volatility

I. AM. EXCITED.

Maybe you’ve noticed… but I can be an enthusiastic fellow! But some believe emotions don’t have a role in investing… I’ve got some thoughts.


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Growing Market Geniuses

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Author F. Scott Fitzgerald wrote, “the test of a first-rate intelligence is the ability to hold two opposed ideas in the mind at the same time, and still retain the ability to function.” 

What if I told you—the best clients in the world—that you (yes, each and every one of you) have that first-rate intelligence? 

See, there’s something in our work together that tests this idea, just about on a daily basis. When you join us, you learn to live with the volatility in the market: it goes up and down, and we accept this as a feature of the ride. 

Very often, it goes down faster and deeper than it goes up. We may expect a 5% drop around three times a year: we might see a 10% drop around every two years. Meanwhile, gains of 10% are few(er) and far(ther) between: we’ve only seen it twice in the S&P 500 this century and only four times in the whole of the last century. And those gains have usually come shortly after one of the big drops. 

But we wouldn’t be in this business if, in the long run, the market went down more than it went up. 

So what gives? There are two seemingly opposing ideas about the market: 

  1. Drops go down faster, farther than gains go up.
  2. It goes up more than it goes down. 

Clients know the secret: the first idea is all about daily events, and the second idea is about the long haul. No guarantees, of course, but it is possible that these things can both be true. We just care less about the former. 

Therefore, if you consider yourself a member of the best client base in the world, then I consider you to be of first-rate intelligence. 

We’ve grown a community of geniuses here at 228 Main. Want to talk more about what this means for you? Write or call, anytime. 


Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmapped and my not be invested into directly. 


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In Any Language, There’s One Simple Investing Goal

Hope, optimism, belief, confidence… In our line of work, it doesn’t matter how you say it. We’re banking on the idea that, overall, we’ll see more up than down.


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On Having a Seasonal Bout of Whiplash

graphic shows a white question mark sitting on a ledge against a bright blue wall

Trying to make sense of stock moves during earnings season might make you sympathize with Elmer Fudd.

Maybe you’ve seen the classic cartoon that goes like this: Bugs Bunny and Daffy Duck, chased by the hunter Emler Fudd, start arguing over which animal Elmer is supposed to be hunting.

“Duck season!” Bugs yells.

“Rabbit season!” Daffy insists. They continue this way until Bugs seamlessly switches his response to “Rabbit season!” At this point Daffy Duck counters with the only logical response… “Duck season!”

Elmer promptly shoots his foolish prey.

And now everyone’s shouting, “Earnings season!” Each company that issues publicly-traded stock must report about its financial wellbeing quarterly. In theory, the effects of this process should be simple for investors: a company that posts a good performance should see stock gains, and a company that posts a poor performance should see stock losses. Right?

But many folks view earnings reports through the lens of their expectations. A company that does well might still seem like a disappointment to those who expected even more from it. And when a company beats consensus expectations, some investors may second-guess the showing and bet on an even bigger blowout.

Stock prices can swing wildly up and down in response to earnings reports, with less logic than the duck season, rabbit season debate. If you listen to market commentary you may hear many different (even contradictory) explanations for why a company dropped on seemingly good earnings or rose on seemingly bad earnings.

Zoom out: ten years from now, do you think you will remember what one of your stock holdings did in response to one earnings report those many years ago?

The big investment news stories worth remembering will be about bigger issues than a quarterly earnings report.

We already know stock investing involves volatility—and some of it comes around like clockwork every three months. Clients, if you are ever wondering about sudden market moves, give us a call before anybody goes daffy.


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If All Your Friends Did It…

photo shows a pile of pigeons sitting on top of each other on a telephone wire in a partly cloudy sky

“If all your friends jumped off a bridge, would you?” 

Does this line give you any childhood flashbacks? (Rhetorical questions abound in today’s reflection!) We’ve been noticing the number of headlines featuring the word “concern.” 

  • “Is this development a cause for concern?” 
  • “Top officials express ‘concern’” 
  • “Latest numbers raise concern” 

Whether it’s about the latest COVID-19 variant, rising prices for consumers, or bottlenecks in logistics, there seems to be plenty of concern going around. 

We’d like to pause here, though, for an important distinction: “concern” is not the same as “panic.” Life is full of “troubling developments.” We get to choose which stimuli rev us up and which improve our view of reality. Aren’t we better for having a more accurate picture? 

On a recent morning, I noticed lots of action online and in the news that might have startled some investors. I decided to spend a few hours in the office that I hadn’t planned on, just in case there were calls to catch from you, clients. There wasn’t a single ring. 

I should’ve known better. 

“If all your friends jumped into a panic, would you?” Of course not. In fact, there’s that other classic line that makes a lot more sense: “This is no time to panic.” 

Panic rarely helps. Those bursts of energy may have served us when it was time to run from an animal of prey, but these days that’s not exactly a regular demand.

Soothe your system, then let’s get some perspective, gather the facts… and go from there. The leap to panic is a shorter—but way more costly—trip. Clients, want to talk through anything troubling? You know I’m here for that. Write or call, anytime, and we’ll sort it out together.


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Fast Times, Slow Times

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The past two years require some context: the fastest bear market ever then became the fastest recession ever that then became the fastest recovery ever. In fact, the S&P 500 stock index doubled from the low point faster than ever. At the start of the pandemic, with so much fear and uncertainty, the five-week drop was sharp but short.

Then things turned around.

All we had to do as investors was sit tight, rearrange things a little where we saw a chance at a bargain, and wait a short while.

Long-time clients will remember the slow times of the past, when bad weeks in the middle of bad quarters in the middle of bad years seemed to go on forever.

When account balances were lower than the year before.

When it seemed like the economy would never recover.

The human tendency is to believe that current trends or conditions will continue: it makes it difficult to keep the faith in the slow, bad times. But we know how this works, so we keep the faith despite it all. Spring comes after winter. Recovery and growth follow recessions.

The fast times we’ve had recently will inevitably slow down. The next recession, the next bad year is out there. No one knows when. Those who claim to know are so often wrong they can’t be relied upon. We find solace in knowing the tough times may bring us the bargains that make the good times good.

Clients, we will continue to rely on the principles that have served us well over the many years we’ve been at it. Looking for bargains, avoiding stampedes, seeking to own the orchard for the fruit crop. Whether trends are moving fast or slow, up or down, we seek to understand the seasons and the cycles of the market.

We cannot guarantee results, but we’ll still be here doing what we do when times change. Clients, if you would like to reminisce about the olden days or talk about the future, please email us or call.


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Big Trust

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Many of you know I prefer my exercise in the form of a long morning walk. These constitutionals have become routine as I’ve settled into this chapter of my life here in beautiful Louisville. I have my favorite paths, and the steps have become familiar.

Familiarity is a comfort, in many arenas. People sometimes feel uneasiness in their financial planning, bringing big fears and big feelings to money. And it’s not just those 20-somethings starting out in their careers or with young families or during big moves.

Each new chapter of life can bring unique financial challenges, so even the most familiar paths can seem to shift on us as we go.

I’ve thought about this in terms of my physical wellbeing, too. I have family members who prefer to hop on a bicycle for hours on end, some who hike in the mountains at every opportunity. Those paths seem foreign to me, an avid small-town walking enthusiast.

But then again, I haven’t tried them.

Clients, many of our conversations revolve around imagining new paths forward. It can be thrilling or frightening, joyful or bittersweet. But new paths aren’t about knowing exactly how to get where you’re going. A clear sense of where you’re headed will suffice. The rest is an adventure of details, one step at a time.

None of this is to say we must “conquer” our fear or anything like that. It’s nearly the opposite of that: it’s seeing the fear and choosing to let it ride along—because the trust is bigger than the fear.

Trust that Future You will be able to ride with the feelings as they pop up. You don’t have to know exactly what’s coming: if you believe in your goals and trust your ability to handle the journey, that’s enough to get it started.

Clients, where to next? Write or call, anytime.


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Where Are You on the Ride?

photo shows people going down a hill on a roller coaster, yelling and arms either in the air of clutching a bar

With summer fading in such a strange year, we find ourselves revisiting old memories. This will date me, but I’m thinking about the summer thrills we used to enjoy at places like Omaha’s Peony Park or Lake Okoboji’s Arnolds Park.

Part of the fun of a thrill ride is the anticipation. There’s a story and a rhythm to each ride. On a coaster, you make the climb—with a thunk-thunk-thunk on a lot of those “classic” rides!—and you can see the drop coming. Although you won’t know what they feel like until you get there, you can see the curves ahead.

And it’s all fleeting. The climb may feel like it takes forever, the terror of the drop may flash your life before your eyes… but you don’t go up and up forever, and you don’t fall down and down forever.

Sound familiar? Clients, you’ve heard us say this exact thing as a reminder about the markets.

Part of this lesson could use more attention, though: the ride can just be a ride when we know where we are on it.

When investors enjoy the climb of a hot stock, some mistakenly rush to throw everything they have at it, not recognizing that they are already near the peak: that thing will not go up and up forever. Nothing does. (Incidentally, this exuberant behavior can contribute to bubbles.)

Likewise, some get the itch to sell out when a stock cools off—but things may just be down for now and not down forever.

We don’t have a crystal ball, and we don’t have a map, but we know there are rhythms and cycles. What pain could we save ourselves by using a little perspective?

Where are we on the ride?

Clients, we’re here to help make sense of your plans and planning. Call or email when you’re ready for us.


Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual.

IT WORKS UNTIL IT DOESN’T

the photo shows a wooden desk with a keyboard, notepad, pen, and balled up pieces of paper

We’re contrarians. We are not satisfied with conventional thinking that portfolio management requires plugging in the right numbers and then following the formula.

It’s not that simple—and it can actually lead investors astray.

Here’s the deal. Modern portfolio theory—one version of the conventional wisdom—uses rigorous statistical models that attempt to quantify volatility and risk in their many forms. The idea is that if you can measure and predict volatility then you can construct a portfolio that has only as much volatility as you desire.

We believe there are a lot of problems with this approach. These models all rely on the assumption that the market will continue to behave rationally. So when the market experiences irrational exuberance, statistical models quickly lose their meaning and begin producing nonsense.

For example, one measure of a stock’s volatility is called its “beta.” The more correlated a stock’s movement is to the broader market, the higher the beta. A high beta stock tends to be a big winner or big loser based on what the market is doing, while a low beta stock generally moves less than the market. A stock can even have a negative beta, where it tends to move the opposite way from the rest of the market!

Under normal circumstances, volatile stocks tend to have a high beta. But when a hot stock gets caught up in a speculative bubble, it can take on a life of its own. A stock on a hot streak that goes up even on days when the market is down will show a lower beta than stocks that follow the market but may still be volatile.

In cases like this, investment managers that are chasing “low beta” may end up with some very volatile holdings in a portfolio that claims to prioritize stability and low market correlation. And investors that are looking to avoid the roller coaster of the stock market may find themselves on an even bigger ride without realizing it.

We believe statistical analysis can be useful, but it cannot compete with timeless investment principles. Trying to quantify volatility exposure can lead to ugly surprises when the underlying models break down.

We think there’s another way. Instead of trying to mathematically capture and avoid it, we believe in living with volatility. If you are investing for the long haul and you know where your cash flow is coming from, you do not need to fret about day-to-day price action.

Clients, if you have questions about this or anything else, please give us a call.


Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All investing involves risk including loss of principal. No strategy assures success or protects against loss.