Since the financial crisis of 2007-2008, investors have been spoiled.
From March 2009 through January 2018, the S&P 500 has returned 18.3% annualized. Moreover, despite high levels during the financial crisis and spikes in 2011 and 2015, volatility has been surprisingly low for much of the past 15 years.
At the end of 2017, the S&P 500 One-Month Realized Volatility Index dipped under 6%. For investors, high returns and low volatility are a fantastic combination.
Such good times couldn’t roll forever. Volatility is back.
The S&P 500 One-Month Realized Volatility Index is above 25% as of early February. That level isn’t remotely unusual or even all that high, but investors who had gotten spoiled by one-way traffic to higher prices have been spooked nonetheless.
Anytime is a good time for a reminder of the fundamentals of market movements, and the advent of volatility after a long absence is a particularly good time. Thus remember: Volatility is normal and necessary.
During these sorts of transitional periods in the markets, I am regularly and invariably asked — longingly — for “the next Amazon.” The thinking is that if these investors could just smoke out the next great whatever company, all would be well and investing would be easy. Good investing is never easy. It is always hard.
Finding “the next Amazon” is really hard. Over the past 90 years (through 2015), 58% of all stocks underperformed one-month U.S. Treasury bills and most lost money over their lifetimes.
The best performing 86 stocks accounted for more than half the $32 trillion in value generated by stocks over T-bills during that time while a mere 4% of stocks accounted for all the outperformance of stocks over T-bills. Finding any outperforming stock is a daunting challenge. Finding “the next Amazon” in advance is insanely difficult.