Gil’s Musings

Long Live Volatility 


For those who know me well, you then know about my family’s long-term friendship with Walter Thomas. Walter has worked for my family since 1963 when he was 16, and I was 4, and I still introduce him as my brother. To this day, Walter takes care of my mom, doing her shopping and honey-dos. In addition, he comes into the Segment office on Fridays to joke with the staff and pick up his check.

Walter asked me this past Friday why I was so calm when the world around me seemed to be falling apart. He said, “With the stocks going down, and the Covid mess, how come you’re not all emotional about it? Why do you always appear to be so even-keeled?” I told him that I have the abundance mindset and how I could not experience long-term harm by the market’s short-term spasms. I explained that what a person fundamentally believes will shape what they feel and fear about the here and now. Are losses and chaos the “normal” state of things? Or is order and higher prices over time the “normal” state? I believe in the latter. A market setback, therefore, does not undermine my faith in its recovery.

I often tell people that the best-performing investment clients have ‘faith in the future’ as their defining characteristic, and the worst-performing clients do not have that but instead, routinely give in to their fears. The more we replay in our heads the scenarios that make us tremble, the more we deceive ourselves into believing them as truth, and the more we believe that we have insights about how to deal with them. These insights can take the form of living life from within a financial bunker we’ve built for ourselves or quickly retreating at the first sign of trouble, robbing us of the gusto we could have experienced. Humans sure have some quirky mental attributes. It seems the more we fear something, the more susceptible we are to its damages.

Market Volatility

Prompted by last week’s market gyrations, I received just a couple of alarmed phone calls; some new, some as expected. I asked one of the new inquirers how his life would be different if he suddenly lost 1/3 of his money. He responded that it wouldn’t be any different. Then I asked if he could envision a set of circumstances that would make it all back again. He said he could. I then asked him what he learned from the abysmal sell-off in 2008, now that the market was not only at a new high, but now three times higher than the pre-crash 2007 level. He said all the fretting seems now to have been a waste of energy. Then I wanted to know if he somehow felt this time was different. He said, “I feel better; thanks for coaching me off the ledge.”

Market declines do not cause losses unless you liquidate. Up until that point, it’s simply variability. It is also important to remember that last year’s stock market rise (2021) came as a total surprise to me and others. So doesn’t last year’s rise give me this year’s ambivalence? This only becomes a problem if I “take possession” of the new highs in my portfolio and measure the future against my “high water marks”. This would surely set me up for disappointment and stoke my demons.

Hopefully, I have convinced you that nasty market declines are precisely why equities have high returns. If you pine for the days of low volatility, you are only inviting nervous ninnies to participate, who will merely dilute your future returns. They will also contribute to future volatility as they all seem to head for the exits in sync.

Long live volatility!

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