Different Makes a Difference

The Odlum Brown Research Blog

Accepting Volatility

By Dan Hincks, CFA, Equity Analyst
Tuesday, March 10, 2015

This year marks the Golden Anniversary since Warren Buffett and Charlie Munger took charge at Berkshire Hathaway. Over the past 50 years, this dynamic duo has grown Berkshire Hathaway from a struggling textile operation to a collection of world-class businesses. The result? Berkshire’s value has increased by 1,826,163%. While the journey has created immense wealth, the ride wasn’t always smooth – there have been three times since 1965 when Mr. Munger and Mr. Buffett watched Berkshire’s stock fall about 50%. Considering that their investments in Berkshire account for the majority of their personal net worth, the two are clearly masters of equanimity.

Mr. Buffett and Mr. Munger have done well by accepting volatility rather than trying to anticipate major setbacks. The best protection against share price volatility is a long time horizon, allowing the investment return to better reflect that of the underlying business rather than the current state of investor sentiment.

We look to invest in businesses that will create tremendous value over time, yet we realize that the path to greater wealth will be volatile. Following six years of “up” volatility, investors are becoming complacent and accustomed to this seemingly one direction market. While no one knows when future corrections will occur, we are certain there will be more. Ask yourself, “Could I stomach a significant decline in my equity investments and stay the course?” If the answer is no, now might be a good time to work with your Investment Advisor to adjust the asset mix in your portfolio to reduce volatility and minimize the chance of panic when inevitable corrections arrive.   

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