You've probably heard the admonition that as a trader, you should welcome volatility and that it makes no difference whether the stock market moves 0.25% or 0.5% or even 5% a day...... It is also true that some people believe that if there is more volatility, it means that the stock market has created more mispricing, and theoretically more money can be made.
Howard Marks and Warren Buffett also insist that volatility is not risk, but a permanent loss of principal (those who hold similar views place more emphasis on the all-time maximum drawdown of the equity curve than volatility)
Still, I want to remind you that navigating highly volatile stocks can be harder than you think.
Moreover, portfolios with previously low yield volatility will have higher future returns than previously high volatility portfolios, which is contrary to the traditional expectation that riskier assets should generate higher returns.
Suppose there is a low-volatility stock and a high-volatility stock, both of which have an average annual return of 10% (the specific annual return is shown in the figure below), but after four years, the actual return of the high-volatility stock is only half that of the low-volatility stock.
Compared with the risk and return of the CSI 300/CSI 500 Index and its corresponding strategy factor representative indices in the past 10 years (2013-2011), the long-term performance of the low volatility factor is very good.
On the contrary, the (green arrow) high beta portfolio has underperformed the CSI 300 in terms of returns. It can be seen that in the A-share market, it is difficult for a high-beta combination that only has offensive capabilities but no defensive characteristics to beat the index.
Note: When the price of a stock moves exactly in line with the market (benchmark index), its beta is 1. A high beta means that the volatility of the benchmark index is amplified.
The first is that human nature prefers to win high returns by taking small probability events. Stocks with high volatility You can also call them "lottery stocks", although most of the time they are losing money or have a low rate of return, but because of the hope of making a lot of money and the success stories of others, they can still attract many investors to participate. On the other hand, some highly volatile stocks have performed well in the short term and are easily sought after by investors, and the potential speculation behind their high returns will also lead to stock price corrections.
Putting aside the formula, you should stay away from market participants when their emotions are high and extremely volatile, when market expectations converge and most of them have been delivered, and stocks with low market attention and expectations and little price change are worth tracking, the so-called "buy when no one cares".
For example, in "The Cheats of Trading Champions", we introduced the volatility contraction pattern VCP:
The ideal breakout buying point is the tipping point when the price starts to change from low volatility to high volatility. (Note: The high and low changes in volatility also follow mean reversion)
The "Chandelier System" shared in "The Problem of the Century, How Many Positions Should I Use to Buy?" also uses a similar principle: