Veteran news anchor Ashley Webster asked me this week, point-blank, during an appearance on FOX Business Network…
"…All of this volatility – and these big, triple-digit moves up and down – is this going to be the norm [going forward in 2016]?"
Contrary to what most investors believe, though, that's not a bad thing. The biggest profits almost inevitably spring from the deepest of market dips.
What's more, the best companies always rise to the top – which is why you want to grab them at beaten-down prices every chance you get.
Today I've got three big names for you – each of which proves that rising volatility is not the harbinger of doom that most investors think.
How to Reach a Profitable Understanding of Volatility
Millions of investors mistakenly assume that "volatility" is synonymous with big down days, and with good reason. That's when the headlines associated with the latest sell-off scream financial doom and gloom. It doesn't help that there's plenty of exceptionally dark commentary at the same time from earnest-looking pundits who have never traded a day in their lives.
Honestly, they might as well be using an Ouija Board.
Volatility is not some esoteric dark art.
Volatility is simply a measure of the relative rate at which the price of a given stock or bond or any other financial instrument moves up AND down.
You calculate it by figuring out the annualized standard deviation of price daily and can easily understand whether it's rising or falling by looking at the VIX, a key measure of volatility reflecting S&P 500 stock index options prices.
Or you can simply look online. Most of the top online brokerage platforms quote the VIX, which is published by the Chicago Board Options Exchange (CBOE). You can also find it very easily by searching "VIX" on Google Finance.
But let's not get sidetracked.
Any stock that moves up and down quickly over short time frames is regarded as having high volatility, while a stock that moves slowly or remains flat is considered to have low volatility.
Now here's where it gets fun and potentially very profitable.
Most investors don't like volatility because they associate it with losses. They crave stability when, in reality, they want the big returns that can only come from volatility.
Let me show you what I mean.
Imagine two stocks: ABC and XYZ.
Both begin and end the year at $100 a share but along the way demonstrate wildly different volatility.
Let me ask you – which stock offers you the opportunity for bigger gains?
ABC – it's more volatile and there are more corresponding price dips that can be exploited for bigger gains and quicker upside.
That's why, at the risk of becoming repetitive, I'm always telling you to "buy the dips and sell the rips," because the volatility represents changing prices which, in turn, create opportunity.
Simply put, you can buy low and sell high more often with high-volatility stocks than with low-volatility stocks. Combine this knowledge with lowball orders and proper risk management and you can begin to see the potential as easily as I can.
To be fair, I've just scratched the surface here.
You can't simply buy and sell high-volatility, gee-whiz bang stocks and laugh all the way to the bank. There are always risks. That's why we talk about them incessantly – because the returns will come if you control the risk needed to achieve them.
Building Total Wealth implies having a blend of both high and low volatility investments based on your individual investment objectives, income goals, and the like.
Sadly, 99% of all investors will never understand what I've just shared with you. So they'll cringe reflexively every time they hear the word "volatility" without truly understanding what it really means and the potential it heralds.
So if you take one thing away from our time together today, let it be this – never forget that volatility equals opportunity.
The world's best traders and most profitable investors almost never make their money when the markets are booming. They make their fortunes by wading into quality stocks that are priced at a discount when headlines trigger sell-offs, volatility is rising, and less savvy investors are headed for the exits.
Speaking of which, here are three "must have" tech companies poised for some really terrific volatility-induced gains when the dust settles.
We've talked about them a lot in recent months, but that doesn't change the fact that they're all compelling choices at the moment because the volatility that spooks less savvy investors has put them on sale in concert with a broader sell-off that continues even this morning as I write this.
Must Have No. 1: Netflix Inc.
Netflix Inc. (Nasdaq: NFLX) has been on a tear since late 2012, returning more than 1,200%. Many people think that can't continue, but I'm not one of 'em.
The company just crushed earnings expectations, posting $0.10 per share versus analyst expectations of $0.02 per share. Revenue was reported at $1.82 billion versus only $1.48 a year ago and $1.83 expected.
Nearly 80% of the company's new customers last quarter came from outside America. As the company continues to grow internationally, consistent double-digit revenue growth seems like the most likely scenario.
I'm especially excited by plans for Russia and China that suggest plenty of explosive growth ahead, even as the U.S. markets become saturated.
I don't think $200 a share is out of line in the near future.
Must Have No. 2: Facebook Inc.
I avoided Facebook Inc. (Nasdaq: FB) for a long time because I didn't have the sense that Mark Zuckerberg knew what he wanted it to be when it "grew up." But that's changed in recent months.
Through a series of savvy acquisitions ranging from the $19 billion acquisition of WhatsApp to the $2 billion purchase of the virtual reality company Oculus, Facebook is laying claim to a virtual future that most people don't see coming, let alone understand. What's more, with $15.8 billion in cash reported during its last quarter, the company has the resources to make it happen.
The virtual reality sector alone is forecast to soar to $30 billion by 2020, and DigiCapital forecasts that augmented/virtual reality technologies could total $150 billion by that time frame.
If these projections are even halfway correct, Facebook is entering a fabulous new era and the time to get in is now… when volatility has handed you the opening.
A price tag of $150 12 to 24 months from now doesn't seem like a stretch.
Must Have No. 3: Alphabet Inc.
Unlike other tech stalwarts including Microsoft and IBM, Alphabet Inc. (Nasdaq: GOOG) – formerly Google Inc. – hasn't stalled.
Google grew its cloud presence by 101% from 2014-2015 by spending a $10.9 billion sum on cloud infrastructure… hefty, you might say. But the juice is worth the squeeze, with the public cloud market expected to swell to $112 billion by 2018. Combine that with Google's other ambitious ventures in VR technology and the Internet of Things, and this is very much a company of the future.
No, strike that… a series of companies of the future. Plural.
I believe the move to Alphabet is simply the first in a long line of strategic moves that will see management unlock as many as 10 individual breakthrough companies now operating within it.
Shares are still very expensive, so this may be one of those companies that you edge into or buy a few shares at a time and tuck away for years to come.
It's not as volatile as either Netflix or Facebook, but that doesn't change the fact that you can capitalize on the smallest jump in volatility if you play your cards right.
I'll be back soon with a look at another strategy that's a perfect way to harness volatile market conditions and grow your money anyway.
While the rest of the world is panicking over January's market woes, Keith's readers are profiting. Click here to get his latest investor briefing on the top three ways to make money from a market correction, and get all his Total Wealth research free.
About the Author
Keith Fitz-Gerald has been the Chief Investment Strategist for the Money Morning team since 2007. He's a seasoned market analyst with decades of experience, and a highly accurate track record. Keith regularly travels the world in search of investment opportunities others don't yet see or understand. In addition to heading The Money Map Report, Keith runs High Velocity Profits, which aims to get in, target gains, and get out clean. In his weekly Total Wealth, Keith has broken down his 30-plus years of success into three parts: Trends, Risk Assessment, and Tactics – meaning the exact techniques for making money. Sign up is free at totalwealthresearch.com.