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Why Investors Should Embrace Volatility in Stock Markets

Investors who have been investing for some time have probably witnessed many emotional moments in the stock market. Benjamin Graham, the father of value investing, used a wonderful allegory to describe the moods of the stock market, by likening it to a manic-depressive man known as “Mister Market“. The ups and downs associated with emotional states are aspects of investing which affect many investors, including yours truly.

Many investors may therefore hope for a more peaceful, serene stock market environment where there are less sharp share price swings. But does this really present an optimal environment for investments? Would investors really be better off with peace and quiet or is there an advantage to volatility and “turmoil”? Let’s take a closer look at this issue.

Lower volatility

Perhaps we should first define what the term “peaceful” means. Volatility is an inherent aspect of stock markets, and many people equate volatility with the concept of risk, though in an article I wrote, I disagree with this viewpoint. When people comment that markets are peaceful and calm, they are referring to lower volatility in share price movements.

Throughout history, there have been periods when stock markets were in a state of blissful calm. In numerical terms, this means a period of time when the market’s ups and downs do not exceed 1% per day. Calmness provides relief to investors but endows them with a false sense of security, as people expect markets to remain predictable in the future.

Volatility creates opportunities

For patient, long-term investors, volatility actually helps to create opportunities for them to buy stocks cheaply. When other investors react emotionally to bad news, it causes them to dump their shares in fear and panic. This pushes valuations down to bargain levels. This happens much more frequently than one would imagine, as the emotions of fear and greed are at the core of how stock markets function.

Think long-term and embrace volatility

Investors who invest for the long-haul and keep their focus on corporate fundamentals should, therefore, welcome a turbulent stock market as it opens up numerous opportunities for them to buy shares cheaply. By taking advantage of Mister Market’s depressive and despondent moods, you’d be able to buy great companies cheaply when they get beaten down.

Though a peaceful stock market provides assurance and a measure of certainty, it does not offer windows of opportunity for long-term investors to capitalise on the emotional mistakes of other panicky investors.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice.