When something you expect to happen, doesn’t happen, you get surprises. In markets, the result is an adjustment in prices. Some people might call it volatility.
Of course, volatility carries a negative connotation (confusing it with risk hasn’t helped its image either). I’ve heard nobody is comfortable around asset prices that jump around a lot. It’s apparently so bad, that people purposely build strategies to minimize it in their portfolio. Their goal: avoid surprises.
A smart contrarian might see it differently: volatility — surprises — are a feature of markets. Expectations are often wrong, unexpected things happen, prices adjust sometimes dramatically, which creates opportunities for those less fearful of volatility. In other words, embracing surprise leads to opportunity.
Suppressing volatility is no different than attempting to remove surprise from markets. It’s not only impossible but it — probably, eventually — leads to more of the thing you’re trying to avoid. How does it go — “Stability leads to instability.” Continue Reading…