In one episode of my favorite show, Seinfeld, Jerry Seinfeld sells his shares of a stock when the price falls below the price he purchased the stock, while his buddy George holds on and the stock makes George a small fortune in George's context. Jerry's girlfriend at the time reminds Jerry that he wouldn't have made his ill-timed sale if Jerry had listened to her when she told him that "stocks fluctuate." Like most comments from women to Jerry on the show, this comment ended the relationship. And while it is true that markets "fluctuate," recent intra-week, intra-day, and even intra-pre-market so-called fluctuations have been in excess of 2% on many days during these past few months.
It is hard to know what this heightened volatility means, but based on 2007 and 2008, I would not be surprised if this heightened volatility is signaling that there is a high level (relative to historical averages) of financial leverage being used to buy financial assets. In addition, the increase in the size of the financial derivatives market is likely to blame as well, as is the increasing size of the exchange-traded fund (ETF) market, which must amplify the impact of any gyrations in the financial markets as selling or buying of securities may beget more selling and buying of such securities as investors re-size their ETF holdings.
My sense is that heightened volatility is associated with near-term downside in financial markets indices, and that opportunities for long-term value investors to buy world class businesses at bargain-basement prices relative to the businesses' free cash flows will arise soon.
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