A few of my professors from Creighton University recently published an article in The Journal of Wealth Management, where they tested the commonly held belief that the stock market is more volatile now than in the past. At first glance, this sounds like a reasonable assumption. People tend to believe everything is worse today than it was in the past. Whether it is violence, health, or income levels, most people tend to think the world is in a downward spiral. They are wrong. I will let Hans Rosling explain.
So with Hans Rosling’s optimistic outlook in mind about how the world is mostly improving, what did the Creighton University Professors discover?
Are today’s markets more volatile than yesterday’s?
Yes and no.
Between 1929 and 2014, when looking at daily data, the market is more volatile. When looking at monthly data over the same time period, the volatility has not changed. Interesting.
This is both a blow and boon to efficient market theory. It might also be an opportunity. As more information becomes available, markets should become more efficient and less volatile as the correct value of a security is discovered more quickly. This is the theory. This is not exactly what is happening.
I don’t know why markets are becoming more volatile in the short term. Perhaps it is the throngs of day traders, the decimalization of stock prices, or the rise of the machines with their algorithms and high-frequency trading. It might be all of the above. If you hold stocks for more than a day, it doesn’t matter why. Monthly volatility has not changed significantly. In the long run, it all washes out.
The implication of this disparity presents an opportunity. The opportunity is to buy when the markets are depressed for whatever daily temporary reason and hold for the long-term when sanity returns.
This sounds like something a famous investor from Omaha might agree with.
“Price is what you pay. Value is what you get.”
So when Mr. Market goes on sale and your holding period is months instead of days it may be time to buy.