title: Volatility Isn't Risk description: [AFW S.2.9] Investment Principle #9 published: true date: 2026-06-30T08:08:24.146Z tags: editor: markdown dateCreated: 2021-04-28T18:42:39.451Z
Watch 4 Ways to Handle Market Volatility VIDEO
Watch AF MKOM 1704: Volatility, Part 1 + Two Epiphanies on 529-Plans VIDEO
Watch Volatility is Not Risk Overview VIDEO
“The next 100% in the market will be up, not down.” ―Scott Matthews
1: Use Quotes¶
"I know exactly what will happen in the market in the next 10 - 20 years; it will go up. But I have no idea what will happen Monday morning." -Peter Lynch
"If you bought a house for $400,000 but then the real estate market dropped and your house is now appraised for only $300,000, would you sell it? Of course not. Then why would you do that with your investments?" -Michael
“It's a mistake paying attention to the day to day fluctuations of a stock - it makes no difference. ” ―Warren Buffett
“It (volatility) is the engine that drives the returns. The premium long-term return of equities is simply an efficient market’s way of pricing in their extreme randomness in the short term.
Equities pay 10% long-term because in any given year they might be up 20% or down 20%, and you’ll never know which.” -Nick Murray, NMI February 2020
“The great truth is that the premium return of equities is earned purely by a willingness to ride out their temporary declines. Yet it is those temporary declines upon which human nature fixates.” -Nick Murray
“The only way to achieve the full permanent advance of equities is to be willing to ride out their full temporary decline.” ―Nick Murray
“Volatility is merely randomness around a permanent uptrend.” ―Nick Murray
“I don’t know what 'the stock market' is going to do over the next 12 months; neither does anyone else. And it doesn't matter.” ―Nick Murray
“Since the end of World War II the longest it has ever taken an investor to recover an original investment in the stock market was the five-year, eight-month period from August 2000 through April 2006 (68 months).” -Jeremy Siegel
“The true investor welcomes volatility.” ―Warren Buffett
"Volatility isn't really risk but uncertainty." -Nick Murray
"When the spaghetti hits the fan, don't just do something: stand there. This too shall pass." -Nick Murray
"Anything that suppresses temporary volatility must, in an efficient market, con comitantly suppress permanent return; therefore in order fully to capture equities' quite spectacular permanent returns, one must be prepared ride out their temporary declines." -Nick Murray
“The market is most dangerous when it looks best; but it is most inviting when it looks worst.” ―Frank J Williams
The Advances are Permanent, the Declines are Temporary. *Long-term* the market is completely predictable. Short-term it is utterly unpredictable.
I know two things: 1. The market goes up. 2. The market goes down.
I don't know *when they happen, nor how long they last (and I don't care).* -Nick Murray
“The market does what it should do, but not always when.” ―Jesse Livermore
“It is easy to overreact to the continuous stream of optimistic and pessimistic news, causing an investor to sell near the low or buy near the high.” ―Jeremy Siegel
“The worst course an investor can take is to follow the prevailing sentiment about economic activity. That will lead investors to buy at high prices when times are good and everyone is optimistic, and sell at the low.” ―Jeremy Siegel
“From a broader perspective, individual investors should not fear short-term market volatility. Should you not want to shop in a store where every so often it announces '10 percent to 20 percent off the price of all items for the next 30 minutes?; Short-run volatility has always been part of the stock market.” ―Jeremy Siegel
“Although most investors express a strong distaste for market fluctuations, volatility must be accepted to reap the superior returns offered by stocks.” ―Jeremy Siegel
“You make your money from bad times and collect your money in good times.” ―Arthur Laffer
Read Nick's Client's Corner Volatility, by Its Proper Name PDF
Read Nick's NMS 08 - Expanding on our equity-based investment policy PDF
Read Nick's NMS 09 - Volatility is the accumulator's best friend PDF
Read Nick's NMS 18 - One more look at volatility PDF
Read Nick's NMS 19 - Real risk mere volatility PDF
Read Nick's NMS 38 - On the true nature of volatility: another interim bulletin PDF
Read Nick's ATY 090 March 31 - What is the Risk of the Stock Market? PDF
Read Nick's ATY 091 April 01 - Where Does the Myth Come From? PDF
Read Nick's ATY 099 April 09 - The Big Mistake PDF
Read Nick's ATY 100 April 10 - This Generation's Ultimate History Lesson PDF
Read Nick's ATY 104 April 14 - Surprise is the Mother of Panic PDF
Read Nick's ATY 105 April 15 - What is Volatility Anyway? PDF
Read Nick's ATY 106 April 16 - Lifeboat Drills PDF
Read Nick's ATY 108 April 17 - Volatility Standing on One Leg PDF
Read Nick's ATY 108 April 18 - To Suppress Volatility is to Suppress Return PDF
Read Nick's ATY 118 April 28 - Irrational Stocks vs Rational Companies PDF
Read Nick's ATY 119 April 29 - It Isn't Markets that are Volatile, It's People PDF
Read Nick's ATY 120 April 30 - The Mortal Enemy of Volatility is Time PDF
Read Nick's ATY 223 August 11 How Do They See Disaster Overtaking Them PDF
Read Nick's Around the Year August 16 - The Question We Hope To Be Asked PDF
Read Nick's Around the Year September 21 - Continuing the Friend/Counselor Inquiry PDF
Read Nick's Around the Year October 3 - Get Them to Bolt Now, or Never PDF
Warren Buffet's Volatility Story¶
On October 19, 1987, "Black Monday", the S&P 500 Index dropped 23%. Warren Buffet's holdings in Berkshire Hathaway plunged more than $300 million dollars.
Had he been unnerved and sold, he would have "lost" $300 million.
However, he didn’t sell and the value of his shares by February 2001 (14 years later) were worth over 22 times more than they were on Black Monday ($6.6 billion).
2: The Market Does What it Does. If you know what's going to happen, it's not risky.¶
- See 9 Facts of the Market from Investment Principle #2 - Four Core Investment Principles AFW S.2.2
3: Yo-Yo'ing Up An Escalator¶
Do you know what investing for the long run but listening to market news every day is like?
It’s like riding up an escalator while playing with a yo-yo, and keeping your eyes fixed on the yo-yo instead of the escalator.
Focus on the ride up, not the yo-yo.
4: Focus on the Man, Not the Dog¶
The man walking the dog represents the medium to long-term trend of the world's great companies. The dog represents the short-term volatility.
5: The Market Cycle Clock¶
Investing can trigger all sorts of emotions in investors. Just as markets move in cycles, so do investors' emotions.
- When returns are rising, they may feel confident, secure, happy.
- When returns fall, investors' emotions often do too.
- Stock market cycles often cause investors to do the wrong thing at the wrong time.
- Historically, during periods when equity returns have been relatively high, investors have flocked to the market. When equity returns have been low, many have left; at at time when stock values have been most attractive.
- At its highest point, euphoria, most people are buying. At its lowest point most people are selling.
- It is predictable.
- It always goes clockwise.
- It is a cycle thus always comes back.
- It typically takes 5 - 10 years to complete a full-circle.
- You don't know exactly when each phase occurs, or how long it lasts.
- Left to its own devices, the market ultimately heals itself. A free-market economy goes down, but it does not stay down.
- The issue is fear. It's not important what the market is doing but how you react to what the market is doing.
This Time It's Different (Not!)¶
- When has the market not come back? Never. It's a clock, remember?
- The world does not end. It only seems to be ending. Same for the markets.
- This time is not different.
"The only thing new to this world is the history you do not know. This observation is among the greatest pieces of investment advice ever." -Nick Murray
"The four most dangerous words in investing are: "this time it’s different". -Sir John Marks Templeton
Read Nick's ATY 102 April 12 - It's Never Different PDF