October 16, 2014

“I don’t really care about volatility.” Warren Buffett

I put off publishing this letter for about two weeks, as over the past month, stock market volatility has increased quite a bit. While we are not seeing the wild swings of 2011, we are seeing a significant reaction to the overdue realization that the enduring slow global growth I have talked about multiple times and the end of quantitative easing by the Federal Reserve are both real. 

Buffett’s quote above is meant to convey a message that emotions should not be a part of our investing process. He goes onto discuss how volatility gives us opportunities to buy great companies at good prices.

With the uptick in volatility, I have not responded by fearfully selling assets. We actually were doing some selling between May and September when volatility was lower and most investors were complacent. Instead of being a seller the past two weeks, I have indeed been a buyer.

January 2014

2013 proved to be a profitable year for investors. The S&P 500 rose 29% and set new record highs. Global balanced indexes, more representative of most people’s portfolios also did very well returning about 20% despite a tough year in China which lost 9%.

The high return of the stock market had an expected effect on people. Many investors started to chase returns and look to be more aggressive after years of being risk averse. The result was that 2013 saw the most money from retail investors flow into stocks since 2000. I discussed this in a November article on MarketWatch titled “How Bad Will New Investors Get Hit.”   

The problem with this of course is that the stock market has more than doubled since 2009 and the economy has not done nearly as well. In becoming more aggressive now, investors are betting that the economy will improve enough to justify a continued rise in stocks. 

Interestingly, I find very few people who actually believe the economy is improving in a substantial way.

I am among those who believe that economics are not keeping up with stock market returns. One needs only look at the fact that the Federal Reserve has printed far more money than the economy has grown the past few years to understand that growth is largely illusionary.