Volatility isn't as Rare as They Tell You - So Use It

Adem Tumerkan February 6, 2018 Category: Research

When will we finally learn from the ghost of Hyman Minsky about volatility?

"Low volatility breeds high volatility."

Don't know who that is?

Don't worry - almost no one does. . .

And that's a good thing because it gives us a great competitive advantage.

Hyman Minsky was an economist who passed away in 1996. He came up with many interesting things.

But the most important two in my opinion were his views on volatility and behavioral economics.

He explained that years of prosperity and long periods of calm markets are what create excessive risk taking and reckless speculation.

Therefore, the current low volatility is the foundation for extreme chaos in the future.

Otherwise said, when investors feel safe and complacent, they take on more risky investments because of feeling secure.

This is more important than ever in today's easy money and debt fueled markets.

I decided to test Minsky's theory, so I looked at the VIX - the volatility index - over the last year.

And sure enough, long periods of low-Vol. are met with sudden huge spikes in turbulence. . .

For instance, in the last year the VIX has soared over $15 on five separate occasions.

That's roughly once every 73 days. . .

What I'm getting at is turbulence isn't as rare as the experts make it out to be.

Look how much the VIX has gone up since January 18th – after five months of relative calm.

Good ol' Minsky was on to something. . .

Sudden spurts of instability follow periods of calm.

So embrace the inevitable turbulence.

By finding assets that do well during volatility - you can position yourself to profit.

My favorite is the junior gold mining stocks and put options on overvalued and over-indebted stocks.

There are creative ways to make huge gains during times of chaos.