What is Worse than Volatility?

My family enjoys going to Disneyland. Of course there are quite a few others who enjoy going as well, so crowds are always a consideration.

We once took two of the kids to the park in January when the crowds are typically smaller. Lines were indeed shorter but still not as we had hoped. Sometime around noon, clouds moved in and it began to rain so we sought shelter in a gift shop for about 20 minutes until it stopped. When we went outside, to our astonishment, the place had become a ghost town. I have a favorite picture in my album of Launa with the two kids standing on Main Street, and in the background there is not a soul in sight. I had never before seen Disneyland so completely empty. We spent the rest of the day enjoying the park without waiting on any of the rides.

I thought of the above experience on a day when we found ourselves at Disneyland recently on a warm summer Saturday morning. The lines, mostly over two hours long, were so unbearable that we just left and went to the beach.

The laws of supply and demand are really quite simple. The higher the demand, the higher the price, and at Disneyland the price you pay is waiting in line. It is interesting that the cost of admission is the same regardless of the crowds, but on January days with a little rain, the return on your investment is significantly higher.

When stock markets are volatile it is not uncommon to hear complaints from investors who just wish their investments would climb on a straight line for their entire lives. Volatility, they believe, (and some foolish radio commentators preach) is the enemy. Like visitors to Disneyland, they want warm summer days with no lines. They fail to understand that, like Disneyland, it is the occasional rain, not the constant sunshine that improves the return on the investment. If markets always went up, if there was no fear or risk, then like a summer day at Disneyland it would rapidly become very crowded. As the crowds grew, the return on investment would go down until eventually it wouldn’t even be worth being there.

Volatility, or rain, is not the enemy. In truth, it can be an investor’s best friend. It is during these rainy times that crowds are scared away and opportunities increase for those who remain. If you always want warm summer days in investing, then buy bank CD’s or fixed annuities, but don’t complain when the returns are disappointing.

Don’t worry too much about market volatility. Recognize it as being necessary to clear out the crowds and open opportunities for those who remain. I appreciate the benefits of volatility, and apparently others do as well. Vickers Research reported this week that stock buying by insiders (corporate executives) is reaching record high levels since mid August. I suppose I am not the only one who sees the value of going to Disneyland on a rainy day.