Downward Volatility exist in Value Investing

Recently, as my portfolio bleeds day by day, I am reminded of, besides Graham's sayings, the observation that downward volatility exist in value investing.

In my opinion, value investing should minimize the risk of total capital losses in the long run. Unless unexpected and very adverse events occur. However, value investing may not imply low volatility in portfolio value in the short run.

A simple (unscientific) example can be found in Warren Buffett's famous speech "The Superinvestors of Graham-and-Doddsville" (Can be found in "The Intelligent Investor"). The speech contains performance records on several value investors which show large negative returns between 30-40% negative returns in 1973-4, in addition to the excellent overall compounded returns. This example indicates that large downward volatility exist in real-life value investing.

Hence, I do expect downward volatitlity to happen from time to time. But it is nevertheless painful for me to stick to sitting-in and trying not to sell during these downward volatitlity periods.


musicwhiz said…
Hi thinknotleft,

Yes there can be extreme volatility in your portfolio as time goes by. This is something all value investors have to stomach in order to be successful. The value of one of my companies, Pacific Andes, has fluctuated 50% up and down these past few months, while the underlying business remains unchanged !

Again, the important question to ask will be: did I overpay for my purchase, and did I have sufficient margin of safety in case something goes wrong ?

Cheers, Musicwhiz
ThinkNotLeft said…
Thanks for your comment.

Yes, the question on margin of safety is important as value investing is more about process rather the short term results. If the process is right, the long term results justify itself.

Personally, in times of downard volatility, I would prefer to ask two other questions :
1) is the price reflecting possible damage in the underlying business?
2) whether there are other more undervalued stock to switch to.

For 2), I recall reading somewhere that Buffett had sold a stock selling at 40 cents for a dollar to purchase another stock selling 20 cents for a dollar.

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