“The time of maximum pessimism is the best time to buy”
John Templeton
Volatility
Volatility is not the same as risk, a perspective that sharply contrasts with typical Wall Street thinking. Mainstream financial theory, rooted in models like the Capital Asset Pricing Model, often equates risk with volatility—measuring it through metrics like beta or standard deviation of stock price movements. This approach assumes that price fluctuations inherently make an investment riskier, focusing on short-term market noise as a primary concern. In contrast, a more disciplined investment philosophy defines risk as the potential for permanent loss of capital, emphasizing the underlying value and quality of a business over temporary price swings. This way of thinking sees volatility as an opportunity to buy undervalued assets, not a threat to be avoided.
“Risk to us is 1) the risk of permanent loss of capital, or 2) the risk of inadequate return.”
Charlie Munger
Preparation is vital in both investing and personal life, as Manchester banker John Mills noted in 1867: “As a rule, panics do not destroy capital; they merely reveal the extent to which it has been previously destroyed.” A margin of safety in the price paid for investments is essential, but so is assessing a company’s resilience—its management, competitive edge, capital structure, and ability to endure unexpected challenges. A strong capital structure, with manageable debt and ample liquidity, greatly increases a company’s odds of surviving economic storms. Investors must avoid squandering capital through reckless leverage, excessive spending, poor past decisions, or neglecting to account for the world’s occasional wild swings. Reflecting on these swings matters because it exposes potential, even rare weaknesses, fostering disciplined habits to stay prepared for unexpected threats. The world’s shocks, from market crashes to economic slumps or personal setbacks, are unpredictable, but you don’t need a crystal ball to prepare. Take charge of what’s in your power: discipline, behavior, spending, savings, clear thinking, planning, etc. By prioritizing these, you build resilience, better positioning yourself to navigate the wild, unknown swings of life with greater strength and adaptability.
On a personal level, maintaining a significant financial buffer ensures stability during intense volatility, allowing individuals to not only survive but thrive. By adopting this mindset, investors can become anti-fragile—a concept popularized by Nassim Nicholas Taleb—meaning they don’t just withstand volatility but actively benefit from it, loving randomness and feeding on uncertainty to snap up great companies at bargain prices during market downturns instead of being blindsided by the market’s inevitable cycles. This anti-fragile approach turns chaos into opportunity, positioning investors to thrive in an ever-shifting world.
“As an investor, you love volatility—you love the idea of wild
swings because it means more things are going to get mispriced.”
Warren Buffett