Posted at 8:00 a.m.
Financial advisors tell us to stay calm and consider the medium and long term for our actions. Why are the markets so nervous and volatile then?
Jocelyn Savoy
Stock market volatility and market declines are an integral part of an investor’s life.
This is what portfolio manager Jean-Philippe Bouchard of the firm Giverny Capital recalls 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 declines 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 dominated alternately by fear and greed. In other words, stock prices, over a short period, are dictated more by the mood and emotions of investors than by fundamentals and reason.
Strangely, the Stock Exchange is one of the only places in the world where participants get carried away when prices go up and 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. “Attempting to explain distorted investor perceptions is futile. It is the equivalent of wanting to rationalize what is irrational. »
However, he points out, the good news is that in the long run, all of these forces cancel each other out and the mirror always ends up adequately reflecting the companies’ intrinsic value.
“Maintaining the right attitude with regard to stock market fluctuations is therefore essential for 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 rather to focus on the reflected object [la valeur réelle des entreprises]. The investor must remain unfazed by these fluctuations and be able to tolerate them. »
To the advantage 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 the majority of investors as a negative element.
Yet, he says, it is quite the opposite. “The rational investor can profit from fluctuations rather than suffer from them. 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 in the long term, stock prices will reflect the fair value of companies. »
Seen in this light, stock market fluctuations become his allies in his quest to accumulate wealth, according to the portfolio manager. “What made Ben Graham say – in his book The smart investor – that the Stock Exchange is there to serve it and not to instruct it. According to Ben Graham, the investor can choose to take advantage of opportunities or simply do nothing. Sometimes just letting the storm pass while stoically watching others panic is a wise response. »
Jean-Philippe Bouchard maintains that knowing how to remain rational in the face of frantic stock market fluctuations is, without a shadow of 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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