Volatility Is the Friend of the Long-Term Value Investor

February 27, 2022

The stock market has been volatile so far this year.  The Federal Reserve plans to raise rates.  This is likely to cause stock prices (which are elevated) to continue declining.

Update May 2022:  China has shutdown part of its economy to deal with the Omicron variant of the coronavirus.  This will impact the global economy.

Russia’s war against Ukraine drags on.

Finally, oil prices have been over $100 per barrel (WTI).  Every time oil prices have been this high historically, a recession has ensued.

Continued stock market volatility is highly likely.

When stocks drop in value, many people want to stop investing, or even sell what they own, out of fear that stock prices will continue dropping.  But the wisest thing to do for a long-term value investor is to take advantage of lower stock prices by buying more shares than you otherwise could.

Consider a hypothetical Stock HQ, which is a high-quality company that you want to buy and hold.  Stock HQ will grow in value over time.

You are going to invest $2,000 into Stock HQ each year in for ten years.  Which of the following three scenarios would you prefer?  Each scenario shows a different path the stock price could take over the next ten years.

Most people prefer Scenario (1) because the stock steadily rises.  However, Scenario (3) is by far the best market scenario to invest in.  Scenario (1) is actually the worst of the three.



A steadily rising market

In Scenario (1), you invest $2,000 each year for ten years in a steadily rising market.  The following table shows the number of shares you will end up with and their value.

Because the stock price keeps increasing steadily, you are buying less shares each year than the year before.  The net result is that you end up with 465.51 shares with a value of $46,550.98.

An increasing but volatile market

In Scenario (2), you invest $2,000 each year for ten years in a rising but volatile market.  The following table shows the number of shares you will end up with and their value.

Because there is more volatility, some years you can buy more shares than the year before.  The net result is that you end up with 484.20 shares with a value of $48,419.51.  So you are better off in this scenario than in the previous scenario due to market volatility.

A decreasing market

In Scenario (3), you invest $2,000 each year for ten years in a decreasing market.  The following table shows the number of shares you will end up with and their value.

Because the stock price steadily declines, each year you are able to buy more shares than the year before.  The net result is that you end up with 1,357.54 shares worth $135,754.28.



The bottom line is that if you are a long-term value investor, you are far better off over the long term if an already undervalued stock keeps declining so that you can keep buying more shares than you otherwise could.

This is also true for the stock market in general.  The next 3 to 10 years are likely to be flat or down.  If so, this will be a wonderful opportunity if you’re a long-term value investor because many good individual stocks will decline in value.  This will allow you to buy more shares than you otherwise could, which will translate into a greater amount of money in 10 to 20 years.

If your investment time horizon is at least 10 years or 20 years, then all that matters is what your portfolio is worth in 10 years or 20 years.  If prices decline in the interim, that is a great opportunity to buy more shares than you otherwise could. 

All that you need to believe is that, over the very long term, the economy grows and the stock market increases.  As Warren Buffett said:

In the 20th century, the United States endured two world wars and other traumatic and expensive military conflicts; the Depression; a dozen or so recessions and financial panics; oil shocks; a flu epidemic; and the resignation of a disgraced president.  Yet the Dow rose from 66 to 11,497.



    • Opportunities to purchase what we deem to be attractively undervalued companies occur more frequently when stock prices are volatile. – Chuck Royce
    • We steer clear of the foolhardy academic definition of risk and volatility, recognizing, instead, that volatility is a welcome creator of opportunity. – Seth Klarman
    • Investors should treat volatility as a friend. High volatility permits an investor to purchase stocks that are particularly depressed and to sell stocks when they are selling at particularly high prices.  The greater the volatility, the greater the opportunity to purchase stocks at very low prices and then sell stocks at very high prices. – Ed Wachenheim
    • We are willing to endure a high degree of stock price and portfolio volatility because we believe it allows us to achieve a greater degree of investment performance over the long term. – Bill Ackman
    • Volatility actually is the opposite of risk.  It’s opportunity.  But you need to think through and fight some basic human weaknesses. – Jeff Ubben
    • Look at market fluctuations as your friend rather than your enemy; profit from folly rather than participate in it. – Warren Buffett
    • One of the great lessons on the crisis was learning the difference between volatility, which most people perceive as risk, and a permanent impairment of capital, which is what we believe is risk. – Matt McLennon
    • Basically, price fluctuations have only one significant meaning for the true investor.  They provide him with an opportunity to buy wisely when prices fall sharply and to sell wisely when they advance a great deal. – Benjamin Graham

This blog post was inspired by the following post by Andy Rachleff: https://blog.wealthfront.com/invest-despite-volatility-2-2/



An equal weighted group of micro caps generally far outperforms an equal weighted (or cap-weighted) group of larger stocks over time.  See the historical chart here:  http://boolefund.com/best-performers-microcap-stocks/

This outperformance increases significantly by focusing on cheap micro caps.  Performance can be further boosted by isolating cheap microcap companies that show improving fundamentals.  We rank microcap stocks based on these and similar criteria.

There are roughly 10-20 positions in the portfolio.  The size of each position is determined by its rank.  Typically the largest position is 15-20% (at cost), while the average position is 8-10% (at cost).  Positions are held for 3 to 5 years unless a stock approaches intrinsic value sooner or an error has been discovered.

The mission of the Boole Fund is to outperform the S&P 500 Index by at least 5% per year (net of fees) over 5-year periods.  We also aim to outpace the Russell Microcap Index by at least 2% per year (net).  The Boole Fund has low fees.


If you are interested in finding out more, please e-mail me or leave a comment.

My e-mail: jb@boolefund.com




Disclosures: Past performance is not a guarantee or a reliable indicator of future results. All investments contain risk and may lose value. This material is distributed for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. No part of this article may be reproduced in any form, or referred to in any other publication, without express written permission of Boole Capital, LLC.