Value Investment Research | Port Wren Capital | Volatility Good for Value Investors

Volatility (VIX) is Good News for Value Investors

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On 2/6/18 the CBOE Volatility Index known by its ticker symbol VIX, hit a high above 45.94 and the overall market went crazy. The VIX is a popular measure of the stock market’s expectation of volatility implied by S&P500 index options, calculated and published by the Chicago Board Options Exchange. Most are still scratching their head trying to figure out what happened to cause it. Some will say it was caused by a large financial institution computer algorithms kicking in using preset stop sell orders. While others will say it was the 10 year Treasury Note interest rate going so rapidly towards 3.00%. Others will say it was caused by ETN (Exchanged Traded Notes) that are highly leveraged products. Most likely, we will never know the true cause.

All this occurred in one trading day, a short-term event to be sure. Let’s look at this in a logical manner using some actual numbers and in a more long-term nature to get a better perspective. First if you look at 2017 you see there was very little volatility which was very unusual for the stock market. Some of VIX numbers in 2017 where: 11.00 on 1/20/17, 10.4 on 5/10/17, 9.51 on 9/20/17 and 11.04 on 12/20/17. All of these figures indicate very low volatility. Second, when you look at the VIX over the past 19 years you can see the high peaks that include: 44.28 in 8/1998, 39.69 in 9/2002, 59.89 in 10/2008, 35.54 in 6/2010, 42.96 in 9/2011, and 28.43 in 8/2015 as indicated in the chart here.

The 8/1998 high of 44.28 was the closest to the 2/6/18 high about 45.94 in about 19 years, but under the highest recorded in 10/2008 of 59.89. So there were only about 4 over the past 19 years that were above 42.00. Turning to some YTD figures in 2018, you see the VIX was 10.00 on 1/2/18, 11.77 on 1/16/18, 13.91 on 1/31/18, 38.21 on 2/6/18, 21.83 on 2/7/18, 29.56 on 2/9/18, and 26.59 on 2/12/18 as a sample.

Therefore, Port Wren Capital, LLC’s opinion is that the overall market has just returned to normal compared to the unusual non-volatile 2017. But what is most important is that volatility is back in the market and it is not necessary a terrible thing. It is also important to point out the underlay fundamentals are still very strong supporting continued growth in equities. The basic fundamentals of a company do not change overnight. And this gives merit to taking a long-term perspective in the stock market rather than short-term. As value investors, Port Wren Capital, LLC sees this return to some normal volatility as an opportunity. The volatility tends to offer discounts on the prices of some stocks. This allows value investors to add to their existing positions at lower prices and to establish new positions.

At Port Wren Capital, LLC, we specialize in picking specific undervalued U.S. stocks using fundamental analysis developed by Benjamin Graham using a five step process. We have beaten the S&P500, DJIA and NASDAQ benchmarks since we started 5 years ago on our own investments. Discover the difference for yourself. To learn more contact us today.

Published: 3/1/18

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