Market volatility always picks up at random moments every year and somehow investors seem surprised about it. Being less surprised is one of the keys to investment success.
In fact, it’s so important that Ben Graham dedicated a chapter to handling market fluctuations in his classic The Intelligent Investor. His parable of Mr. Market has been retold by others (here, here, and here) over the years for the same reason.
Mr. Market has a crazy streak. He also happens to be your partner in a number of business ventures. Mr. Market shows up day after day quoting a price to buy your shares or sell you his.
And every so often, his craziness peaks and he rattles off some ridiculous prices for those shares. Sometimes those price quotes are much higher than they were the week before. Sometimes they’re much lower. And since Mr. Market is so unpredictable, there’s no telling what prices he’ll offer up next week.
Now, it’s up to you to decide if you want to listen. You can take advantage of the offer or you can do nothing.
But whatever you do, never get caught up in Mr. Market’s mood swings. You see, Mr. Market’s singular goal in life is to get you to buy his shares or sell him yours. He doesn’t care if you make money or lose it. He doesn’t care if he does either. To him, it’s all about the transaction. Day after day he does whatever he can to get you to act. The risk is in succumbing to his wishes too often.
Now, investors have a few defenses against Mr. Market’s temptation to do something.
First, knowing yourself is key to investing. If you understand your temperament and tolerance for market swings, you can create a plan around it and build a portfolio you can stick with in good times and bad. The plan doesn’t have to be perfect. It only has to fit within your own constraints. Do that and you shouldn’t worry about the day-to-day moves in the market. The plan will take care of itself.
This is especially true if your time horizon is measured in years. The short-term swings become less important the longer your time horizon is.
Second, studying market history will quickly teach you that Mr. Market’s current craziness is nothing new. He’s been acting up for centuries. The entirety of market history is an endless stretch of crazy volatility broken up by brief moments of calm. If you view it from that perspective, then volatility is normal.
Finally, it never hurts to remind yourself of this either. Getting caught up in market gyrations has been an ongoing problem for investors for as long as markets have existed.
Much ink has been spilled about it too but the message is the same. Market gyrations may be normal but it’s best to be prepared for it just in case.
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The only significance of stock market gyrations to the true investor is that they give him an opportunity to buy good common stocks when they are cheap — or at least reasonably priced — and at times offer him an invitation to sell out at temptingly high levels. — Benjamin Graham
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The availability of a quotation for your business interest (stock) should always be an asset to be utilized if desired. If it gets silly enough in either direction, you take advantage of it. Its availability should never be turned into a liability whereby its periodic aberrations, in turn, formulate your judgments. — Warren Buffett
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The daily blips of the market are, in fact, noise — noise that is very difficult for most investors to tune out. — Seth Klarman
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Volatility gets you in the gut. There’s no question that when prices are jumping around, you feel different from when they’re stable. — Peter Bernstein
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It’s worth reminding ourselves from time to time that gyrations in a stock price may tell us absolutely nothing about the prospects of the company involved. — Peter Lynch
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The problem is not whether price changes should be disregarded — because clearly they should not be — but rather in what way can the investor and the security analyst deal intelligently with the price changes which take place. — Benjamin Graham
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Shortsighted things that people sometimes do for their individual self-interest don’t tend to work out well in the long run. — Ed Thorp
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Benign neglect is the secret to long-term investing success. — Charlie Ellis
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No one can predict with any certainty which way the next 1,000 points will be. Market fluctuations, while no means comfortable, are normal. — Peter Lynch
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You must always be prepared for the unexpected, including sudden, sharp downward swings in markets and the economy. Whatever adverse scenario you can contemplate, reality can be far worse. — Seth Klarman
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Survival as an investor over that famous long course depends from the very first on recognition that we do not know what is going to happen. We can speculate or calculate or estimate, but we can never be certain. — Peter Bernstein
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The investor must recognize that there are uncertain, and hence, speculative elements inherent in any policy he follows. — Benjamin Graham
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The tour we’ve taken through the last century proves that market irrationality of an extreme kind periodically erupts — and compellingly suggests that investors wanting to do well had better learn how to deal with the next outbreak. — Warren Buffett
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You get recessions, you have stock market declines. If you don’t understand that’s going to happen, then you’re not ready. You won’t do well in the markets. If you go to Minnesota in January, you should know it’s gonna be cold. You don’t panic when the thermometer falls below zero. — Peter Lynch
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It’s absolute cockamamie crazy to sell stocks after they drop. Instead, you should say, “Today there’s a first-rate bargain and I’m buying.” — Charlie Ellis
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When investors — individual and institutional alike — engage in far more trading –inevitably with one another — than is necessary for market efficiency and ample liquidity, they become, collectively, their own worst enemies. — John Bogle
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The chief hazard of a careful common stock program is not that it may bring unexpected losses, but that its profits will turn the investor into a speculator greedy for quicker and bigger gains — and therefore headed for ultimate disaster. — Benjamin Graham
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The most important lesson an investor can learn is to be dispassionate when confronted by unexpected and unfavorable outcomes. — Peter Bernstein
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As soon as you realize you can afford to wait out any correction, the calamity also becomes an opportunity to pick up bargains. — Peter Lynch
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Quotations fluctuate constantly, reacting often illogically to all sorts of temporary and even trivial influences. — Benjamin Graham
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The mistake most people make is answering the door just because Mr. Market knocks. You don’t have to let him in. — Charlie Ellis
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Last Call
- Price-Conviction Paradox – Investor Amnesia
- Bubble Stock Meltdown – Verdad
- Fluke – M. Housel
- Why Agatha Christie Could Afford a Maid and a Nanny But Not a Car – Full Stack Economics
- Value Investor’s Guide to Web3 – Sparkline
- Gaming the Smiling Curve – Stratechery
- Arnold Van Den Berg on the Power of Your Subconscious Mind (podcast) – The One Percent Show
- Michael Mauboussin: Finding Easy Games (podcast) – The Long View
- Scientists Are Racing to Understand the Fury of Tonga’s Volcano – Wired
- Top Shots From the 2021 International Landscape Photographer of the Year – The Atlantic
