Volatile Stocks Frighten People; And They Should

For some time I have been subscribed to a site in Verdun Quebec. The Measure of A Plan. I find it quite creative.

The most recent missive was about volatility and it contains a tool you can use to get a sense of how volatility affects us all.

Visualizing Stock Market Volatility

There are many other tools on the site and you will see them on the home page.

You should take a look.


I played with the tool and was surprised to find for a thirty-year period the worst time to be an investor was 1891-1920. The result was get back 2.6x your money. A return of 3.3%. The best was 1932-1961 at 19.2x and 10.4%.

You will see with analysis of this kind there is usually an end point bias. Crash towards the end like 1916 to 1920 or begin very low, like buying in 1932. There is no 30-year period where returns are uniformly 4% nor one where they are uniformly 9%. That is what volatility is about.

The opportunity

Volatility can be your friend or your enemy. If you are emotionally involved at too high a level, that will be your enemy. The two killer emotions of fear and greed will overwhelm you.

If you are more centered and can take advantage of other people’s emotion, you can do quite well. The best current example of that is Warren Buffett. Objective, realistic, cautious, and with a wide world view.

Some Buffett thoughts

  1. What counts for most people in investing is not how much they know, but rather how realistically they define what they don’t know
  2. Widespread fear is your friend as an investor, because it serves up bargain purchases. Personal fear is your enemy.
  3. Grade yourself on your temperament. Temperament is the ability to not be swayed by the market.
  4. I will tell you the secret to getting rich on Wall Street. You try to be greedy when others are fearful. And you try to be fearful when others are greedy.
  5. Nothing sedates rationality like large doses of effortless money.
  6. Periodically, financial markets will become divorced from reality
  7. Risk comes from not knowing what you’re doing
  8. The biggest thing about making money is time. You don’t have to be particularly smart; you just have to be patient
  9. Avoid leverage. Ignore the drama that passes as news these days. Keep a long-term outlook. An unsettled mind will not make good decisions.

How to be greedy when others are fearful and fearful when others are greedy

Buffett offers a thought on that. It is not the conventional wisdom.

“To invest successfully, you need not understand beta, efficient markets, modern portfolio theory, option pricing or emerging markets. You may, in fact, be better off knowing nothing of these. That, of course, is not the prevailing view at most business schools, whose finance curriculum tends to be dominated by such subjects.

In our view, though, investment students need only two well-taught courses – How to Value a Business, and How to Think About Market Prices”

Warren Buffett, 1996 Letter to Shareholders

The premise is if you know valuation principles and you know the market is composed of people who are acting for all sorts of reasons unrelated to value, you can be objective and minimally emotional.

And, that’s the way to bet.

I help business owners, and professionals understand and manage risk and other financial issues. To help them achieve their goals, I use tax efficiencies and design advantages to acquire more efficient income and larger, more liquid estates.

Please be in touch if I can help you. don@moneyfyi.com 705-927-4770

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