A recent post from the Reformed Broker blog, “Volatility Drives Us Mad and Steals Our Future”, pointed out how irrational behavior during spikes in volatility drive investors to wealth stealing decisions, typically selling assets somewhere near a bottom. Josh Brown was referencing the wild volatility of August 2011, but fresher in my memory is the volatility of August 2015. During last year’s market turmoil, I reflected on the emotional impact extreme price swings create, writing about “The 5 stages of Grief… and Volatility.” From that post:
First, I check all of my data connections. Maybe this Bloomberg has stale numbers. Maybe I just need to reboot my PC, the trading desk PCs, my iPad, my Kindle or my Garmin Fenix 3 watch. Surely that makes more sense than seeing 5-10% intraday swings in the market!
Soon after I’ve verified that this is indeed occurring, I become more than a little irritated. Why is this happening to me? Doesn’t Plutus (the Greek god of wealth) know that I am LONG today? Who’s doing this? Is violence a reasonable response if in fact I identify the perpetrator?
Once I calm down a bit, I usually start looking for a way out. Usually it comes in some form of prayer, “I promise I will give up beer for six days if you can give me a 600 point bounce in my NQ position, and I’ll give up whiskey too if I can get 1,100 points in the DAX.”
Once my bargaining inevitably fails, I put in my headphones and start listening to my “woe is me” playlist, ignoring everything else. I try to distract myself with some coding, but then I begin to wonder whether this career is worth it. Maybe I should be saving polar bears in the Arctic, taking up professional mountain running or just go home and go back to bed…even though it’s only 9 a.m.
Eventually, these feelings of despair abate. I look back at my Bloomberg screens and their insane gyrations and I accept for now, that this may be my reality. I then remember that we have developed systems that work well in such times. Even though I’m currently staring at a large red P&L, I pour over the data and see that time and time again, with short-term pain comes the opportunity for long-term gain.
Since its August 24th bottom (probably the day I initially wrote this), the S&P 500 has returned nearly 19.5% (through 8/14/16). Investors who jettisoned their positions at the heights of the extreme market volatility are now likely wishing they had jumped to the “acceptance” stage and not let their grief rob them of the substantial gains reaped over the last 12 months.