Posted at 8:00 am
Financial advisers tell us to stay calm and consider the medium and long term for our actions. Why are the markets so jumpy and volatile then?
Stock market volatility and market crashes are an integral part of an investor’s life.
This is how Jean-Philippe Bouchard, portfolio manager at the Giverny Capital firm, recalls it from the outset, pointing out that the market has fallen by at least 10% 13 times in 25 years. This is the equivalent, on average, of one year out of two.
As for falls of more than 20%, the definition of a bear market, Jean-Philippe Bouchard points out that they are less frequent, but this is still the sixth time in 25 years.
Despite all these declines, he says, the stock market generated a very high return during this period, around 9% per year (including dividends).
“In the short term, the stock market is alternately dominated by fear and greed. In other words, stock prices, over a short period of time, are dictated more by investors’ moods and emotions than by fundamentals and reason.
Interestingly, the Stock Exchange is one of the few places in the world where participants get carried away when prices go up and get depressed when they go down. [une réaction contraire à celle qu’ils ont lorsqu’ils sont devant une pompe à essence !]
Jean-Philippe Bouchard, Portfolio Manager at Giverny Capital
Mr. Bouchard compares the stock market to a mirror distorted by the opinions and emotions of millions of people. “Trying to explain the distorted perceptions of investors is useless. It is the equivalent of wanting to rationalize the irrational. »
However, he points out, the good news is that, in the long run, all these forces cancel each other out and the mirror always ends up adequately reflecting the intrinsic value of companies.
“Maintaining the right attitude regarding stock market fluctuations is therefore essential to getting rich. The key to success lies in the ability not to be distracted by the reflection in the mirror in the short term [l’opinion et les émotions des autres]but rather to focus on the reflected object [la valeur réelle des entreprises]. The investor must remain unperturbed by these fluctuations and be able to tolerate them. »
For the benefit of the rational
In fact, Jean-Philippe Bouchard believes that stock market volatility and the gaps created between the stock market price and the underlying value are often perceived by most investors as a negative.
However, he says, it is quite the opposite. “The rational investor can benefit from fluctuations instead of suffering from them. The irrational and emotional nature of the stock market makes it a source of investment opportunities for those who know how to remain rational and unemotional. The latter knows that, in the long run, share prices will reflect the fair value of companies. »
Seen this way, stock market fluctuations become his allies in his quest to accumulate wealth, according to the portfolio manager. “What did Ben Graham say, in his book The smart investor – that the Exchange is there to serve you and not to instruct you. According to Ben Graham, the investor can choose to take advantage of opportunities or simply do nothing. Sometimes simply letting the storm pass while stoically watching others panic is a wise response. »
Jean-Philippe Bouchard argues that knowing how to stay rational in the face of wild stock market fluctuations is, without a doubt, the most important quality an investor can develop. “You have to be able in your head to transform the words crisis, recession and uncertainty into a single word: opportunity. »
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#Demystifying #economy #volatility