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.
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.
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.
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.
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