Where there is Uncertainty, there is Opportunity

Where there is Uncertainty, there is Opportunity

An argument is made that there are just too many question marks about the near future; wouldn’t it be better to wait until things clear up a bit? You know the prose: Maintain buying reserves until current uncertainties are resolved,” etc…Before reaching for that crutch, face up to two unpleasant facts: The future is never clear and you pay a very high price for a cheery consensus. Uncertainty actually is the friend of the buyer of long-term values.

Warren Buffet

While most value investors are typically considered a risk-averse lot, that’s more to do with the price they’re willing to pay for a given investment. Often the types of situations that attract them are fraught with uncertainty and are perceived by the crowd as being downright dangerous. As companies constantly evolve and change in response to industry or company-specific challenges and opportunities, the lack of clarity around those changes - and the risks that are entailed in the potential outcomes – can cause share prices to diverge widely from the underlying value of the business. The ability to recognize and take advantage of that dynamic is a key element of what sets the best investors apart from the crowd. There are two kinds of events that create uncertainty (volatility) which can offer the investor who can think for himself, an opportunity to take advantage of the herd-like behaviour of the crowd. 

The first revolve around individual companies, such as earnings misses, unexpected news, M&A activity, restructurings and legal issues – things that can make prices and valuations change relatively quickly. In general, prices change much faster than the fundamentals of businesses change. It is the individual investor’s job to investigate what made the price change and then figure out whether the facts have changed as much as the price, if they haven’t changed that much that can be an opportunity to buy something cheap.

The other major source of uncertainty is when a macro event or trend causes the markets to move. These can be industry – specific, but more often than not it involves interest rate moves, currency moves, political instability, and the overall economic outlook. The market reflects at any moment what the stock market crowd think a business is worth, so if macroeconomic factors force people to buy and sell a companies’ stock  while ignoring the long term fundamentals of the company, this can create a disconnect with the price of its stock and what the underlying company is really worth. This can create an opportunity for the observant self-aware investor who can think for himself, to move in and take advantage of the disconnect between the stock's price and its value.