Top Chris Davis tips on navigating market volatility

Top Chris Davis tips on navigating market volatility

Chris Davis Value investor Chris Davis says wild market swings may be stomach-churning for some investors and may send them running for cover, but they should realise that market corrections are the norm, not an exception.

Instead, Davis suggests that long-term investors should root for more volatility and shouldn’t try to predict when these corrections will occur.

“I think we forget that volatility and corrections are the norm. They are an unpleasant but regular part of the landscape. On an average, you could expect a 5% correction every 51 trading days. You could expect a 20% correction every 630 trading days. So, the most important thing is not to try to predict when these corrections will occur, but rather to recognise that of course they will occur,” he says in an interview to a financial website.

According to Davis, when pullbacks and corrections do occur, media overreacts which leads to panic among investors.

He says investors should welcome these corrections because when volatility occurs, active management is expected to shine more, and add extra value to their portfolio.

Davis is the portfolio manager at Davis Advisors and he only invests in his most high-conviction ideas. There are only a very few businesses that meet his stringent investment criteria.

“Although we’ve been in a world where the averages have done great in terms of stock performance, when you look through at the underlying businesses, we’re seeing fewer and fewer businesses that have the combination of characteristics that we love,” he says.

Davis looks for characteristics like strong balance sheets, a period of de-leveraging, earnings growth, solid returns on capital, and wise capital allocation discipline before making an investment decision.

Davis invests in durable, well-managed businesses that can be purchased at value prices and held for the long term. The holding period of a stock in his fund is four to seven years.

Davis focuses primarily on financial services companies and looks to buy companies when they are out of favor.

How to manage risk
Davis says when investors think about risks, the first thing to recognise is that for most investors, risk really boils down to the loss of purchasing power over time, or a lower quality of life.

“It isn’t necessarily about volatility, which has a disastrous effect on investor behavior. When prices go down, the wiring in people is not to invest more, it’s often to invest less. When prices go up, people get more excited. That is an old story and one of the most important risks out there,” he says.

According to Davis, the best world for investors is one in which they feel that markets are risky.

“People say that stock went from $45 to $30, it must be very risky and this is where you should invert it. There’s a simple truth: Lower prices may help increase future returns and decrease risk,” he says.

Davis says long-term investors should be rooting for more volatility and look for that 20% correction that is far overdue and is a normal part of the landscape.

Davis says in order to amass spectacular returns, investors need to find wide-moat businesses with room for margin expansion and earnings growth when average companies may be facing falling margins because of higher labor costs, higher raw material costs and higher interest costs

How investors can navigate market volatility
Davis says while common sense dictates that buying stocks when prices are low is better than buying when prices are high, investors often do the opposite.

“Falling prices make investors fearful and soaring prices make them greedy,” he says.According to Davis healthy investor behavior means being disciplined, patient and unemotional which requires having the temperament and discipline to invest especially when prices are low.He says, in contrast, unhealthy investor behavior typically leads to selling during periods of great pessimism and buying at the top of bubbles.”Such emotional decisions can wipe out years of gains achieved through compounding,” he adds.Davis reveals three specific lessons that investors can keep in mind while investing: 1. Ignore short-term market and economic forecasts Davis says investors often rely on interest rate forecasts and stock market predictions despite overwhelming evidence that these have little or no value in predicting stock price moves.”To build long-term wealth, investors must disregard such forecasts,” he says. 2. Do not try to time the market Davis says investors should not chase the latest hot-performing investment category or asset class and should avoid timing the market.”Again and again we see investors flock to managers and strategies that have recently done the best, only to be disappointed […]

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