1. Howard Marks: Volatility is not risk itself; low-volatility assets and strategies will deliver lower returns.
In his latest memo, Howard Marks elaborated in great detail on the meaning of volatility.
In his view, risk is the probability of an unfavorable outcome, and volatility—at best—is merely an indicator that risk exists. However, volatility is not risk itself.
Howard Marks is known for investing in high-yield bonds, commonly referred to as 'junk bonds.'
Compared to volatility, Howard Marks believes the true risk of high-yield bonds is actually default risk.
Accordingly, he does not place much emphasis on reducing volatility and has not deliberately implemented related measures.
“In our fixed income or ‘credit’ domain, volatility is particularly irrelevant,” said Howard Marks.
In his view, downward price volatility—which many investors dislike—is actually a good thing, as long as it does not signal an impending default.
“Reducing volatility for the sake of reducing volatility is, in fact, a suboptimal strategy: one can assume that, all else being equal, assets and strategies that favor low volatility will generate lower returns.”
“Only managers with exceptional skill or alpha-generating ability can overcome this negative trade-off and achieve a reduction in returns that is smaller than the reduction in volatility.”
However, because many clients, employers, and other principals struggle to withstand sharp fluctuations—particularly declines—asset managers often take steps to reduce volatility.
He gave the example that, over the past roughly 18 years, hedge funds have generally delivered the expected low volatility, but this came with conservative single-digit returns. No miracles occurred.
Howard Marks believes that as long as one does not go bankrupt due to volatility, volatility is merely a temporary phenomenon, and most investors should not place as much emphasis on it as they appear to.
In his view, investors who operate as long-lasting entities, are not subject to lump-sum withdrawals, have core operations unaffected by downside volatility, do not fear being pressured by principals into making mistakes, and carry no debt obligations due for repayment in the short term should not overly concern themselves with volatility.
Of course, he also acknowledges that most investors fail to meet some of these criteria, and very few possess all of them simultaneously.
However, Howard Marks argues that to the extent investors possess these characteristics, they should leverage their capacity to endure volatility, as many investments with high return potential tend to be susceptible to high volatility.
“All anyone can do is their best under given circumstances. But I believe the most important point is this: in many cases, people place far greater importance on volatility than they should.”
2. Buffett: True investors welcome volatility—it enables them to achieve above-market-average returns over the long term.
Warren Buffett, whom we all know well, likewise views volatility as a source of excess returns.
“In our case, our performance may exhibit significant volatility in any given year, but I believe the consequence of this side effect is that, over the long term, we will achieve satisfactory returns that exceed the market average,” Buffett said.
For this reason, Buffett does not concern himself with short-term market fluctuations.
To those who eagerly hope for the stock market to rise, Buffett offered a vivid analogy: “Most people—including those who will be net buyers of stocks in the future—feel comfortable when stock prices go up. These shareholders are like commuters who rejoice at rising gasoline prices simply because their tanks are already full for the day.”
Buffett once said: “In my early days, I was also pleased to see the market rise. Then I read Chapter 8 of Benjamin Graham’s The Intelligent Investor, which explains how investors should view market fluctuations. Everything changed for me instantly—lower prices became my friend. Picking up that book was one of the luckiest moments of my life.”
The chapter Buffett referred to is precisely the one in which Graham introduces ‘Mr. Market,’ and it constitutes one of Graham’s most detailed discussions on market volatility.
Graham stated: “An investor holding a sound portfolio of stocks will inevitably face price fluctuations; however, he should neither worry about sharp declines nor become excited by substantial gains.”
He must always remember that market quotations are there for his convenience—to be used or ignored. He should never buy merely because prices are rising, nor sell simply because they are falling.
As Graham’s direct protégé, Buffett considers Graham’s exposition of Mr. Market to be among the most valuable insights ever offered on investing profitably.
‘In the short run, the stock market is a voting machine, but in the long run, it is a weighing machine.’ This classic aphorism by Graham perhaps offers the clearest explanation of market volatility.
Following Graham’s teachings, Buffett and Munger focus on the underlying business performance of their investment portfolios to assess success, rather than daily or annual changes in share prices.
“It doesn’t matter whether a successful company is recognized quickly; what truly matters is that its intrinsic value continues to grow steadily over time.”
‘In fact, the later it’s discovered, the better—it sometimes gives us more opportunities to buy its shares at a cheap price,’ Buffett said.
In Buffett’s view, true investors can’t get enough of market volatility.
Buffett’s longtime partner, Charlie Munger, also believes that stock price volatility does not measure risk, and he expressed this view even more sharply and directly:
‘Beta coefficients, modern portfolio theory, and all that—none of it makes sense to me. What we aim to do is buy businesses with sustainable competitive advantages at low prices, or even at fair prices.’
‘How can university professors spread such nonsense—that stock price volatility is a measure of risk? For decades, I’ve been waiting for this kind of drivel to end. There are fewer people spouting it now, but they’re still around.’
3. Templeton: Don’t let minor fluctuations and losses undermine your courage.
Sir John Templeton, a master of contrarian investing, was also someone who seized opportunities amid market volatility.
He advised investors: ‘Don’t let minor fluctuations and losses rob you of your courage. Fear and negativity will erode your confidence as an investor and diminish your ability to succeed in the investment world.’
In one conversation, Munger mentioned having experienced drawdowns of over 50% more than once, adding with wry humor, ‘I consider that a mark of manliness.’
It reflects an exceptional calmness in the face of volatility.
Jiang Gui of Xinpu Investment also made a particularly apt remark during discussions with investors in September.
He said, “Ultimately, the goal of investing is to deliver long-term returns that outperform the benchmark index—a hard constraint we take very seriously. Without this discipline, there would be countless excuses for us to abandon continuous improvement. Since we invest in risk assets, investors who tolerate the volatility of these assets deserve fair compensation for bearing that risk.”
Thus, during the sharp market decline in the first half of the year, “we pounced like crocodiles, going fully invested to secure positions at the bottom of the sell-off.”
For most of us, understanding volatility itself is crucial.
Observing and learning from skilled investment managers—their capacity and mindset in navigating volatility, and how they act—can be highly meaningful in helping us overcome the anxiety that volatility often triggers.
“In the short run, the stock market is a voting machine; in the long run, it is a weighing machine.”
This fundamental and simple insight from Graham may be precisely what we need to revisit again and again today.
Editor/Jayden