Why a volatile stock market is a huge opportunity for investors

The stock market is pretty volatile at the moment. But share prices rising and falling sharply give investors the best opportunities to make money.

There’s a lot going on right now, but a good amount of it is just noise that can be safely ignored. In these situations, the best investors stay calm and take advantage of the situation.

Investing 101

Investing in the stock market is partly about buying shares in businesses for less than they’re worth. And when prices are moving, opportunities naturally present themselves. 

Shares in The London Stock Exchange Group are a good example. The stock fell 17% on Tuesday (3 February) before launching a 13% recovery on Wednesday.

I don’t actually have much of a view of the company’s intrinsic value. But I’m hugely sceptical of the idea that the underlying business was 17% worse on Tuesday and 13% better on Wednesday.

That means there’s been an opportunity for some long-term investors to buy on Tuesday, while some speculators or those seeking long-term opportunities elsewhere might sell on Wednesday. And this is all made possible by stock market volatility.

Long-term focus

The big theme this week has been the threat of artificial intelligence (AI) to software companies. And the market has shifted from thinking it’s huge to deciding it might not be that much of an issue.

I’m not convinced that anyone really knows that the next big shock to the stock market will be. It might be news about tariffs, a spike in oil prices, more AI developments, or something else.

The way to invest isn’t to try and forecast which stocks are going to be in or out of favour at what time. It’s to focus on the underlying businesses and what they’re worth. 

There’s always scope for something unexpected to happen, especially over the long term. But the best way to minimise this risk for investors is to stick to things they know very well. 

Durability

In my own portfolio, I try to focus on companies that I think have a long-term competitive edge. And one of these is Rentokil Initial (LSE:RTO). 

I don’t have strong views on AI, geopolitics, or macroeconomics. But whatever happens, I’m pretty sure there are going to be pests in the future and they’ll need dealing with.

That’s one reason I like Rentokil. Another is that its scale gives it a cost advantage over other operators – more business in a smaller area reduces travel time and saves on costs.

I bought the stock when the market was worrying about its acquisition of a major US rival. But it’s outperformed the FTSE 100 since then and I’m pleased to have had the chance to buy it when I did.

Risks and rewards

The main risk with Rentokil is regulatory. Laws around pest control can change and this can create additional expenses that come with meeting new standards. 

That’s something to keep an eye on. But my view is that Rentokil’s scale and cost structure is in a better position to deal with these than its competitors.

In today’s stock market, I think the shares are fairly valued. But I’m on the lookout for the next Rentokil opportunity and volatile share prices give me a better chance of finding it.

The post Why a volatile stock market is a huge opportunity for investors appeared first on The Motley Fool UK.

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Stephen Wright has positions in Rentokil Initial Plc. The Motley Fool UK has recommended London Stock Exchange Group Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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