Posted at 8:00 am
Financial advisors advise us to remain calm and weigh our actions over the medium and long term. So why are the markets so nervous and volatile?
Stock market volatility and market declines are an integral part of an investor’s life.
Portfolio manager Jean-Philippe Bouchard of Giverny Capital remembers this from the beginning, pointing out that the market has fallen by at least 10% 13 times in 25 years. On average, this corresponds to one year in 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 of those declines, he says the stock market has produced a very strong return over 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 are driven more by investor sentiment and emotion than by fundamentals and common sense over a short period of time.
Oddly enough, the stock market is one of the few places in the world where participants get carried away by rising prices and depressed by falling prices. [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 likens the stock market to a mirror distorted by the opinions and emotions of millions of people. “Trying to explain distorted investor perceptions is futile. It is tantamount to trying to rationalize the irrational. »
The good news, however, is that all these forces cancel each other out in the long run and, in the end, the mirror always adequately reflects the intrinsic value of the company.
“Thus, having the right attitude towards stock market fluctuations is essential to getting rich. The key to success lies in the ability not to be distracted by the reflection of the mirror in the short term [l’opinion et les émotions des autres]but to focus on the reflected object [la valeur réelle des entreprises]. The investor must remain unimpressed 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 that arise between the stock market price and the underlying value are often perceived as a negative element by the majority of investors.
But, he says, it’s exactly the opposite. “The rational investor can benefit from volatility rather than suffer from it. The irrational and emotional nature of the stock market becomes a source of investment opportunities for those who know how to remain rational and unemotional. The latter knows that stock prices will reflect the fair value of companies over the long term. »
In this way, stock market fluctuations become his allies in his quest to build wealth, according to the portfolio manager. “What Ben Graham made say – in his book The smart investor – that the stock market is there to serve him and not to teach him. According to Ben Graham, the investor has a choice to take advantage of opportunities or simply do nothing. Sometimes the wise answer is to just let the storm pass and watch stoically as others panic. »
Jean-Philippe Bouchard believes that the ability to remain rational in the face of frantic stock market fluctuations is undoubtedly the most important quality an investor can develop. “You have to be able to turn the words crisis, recession and uncertainty into one single word in your head: opportunity. »
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