The Rational Investor #015: Morgan Housel on Why Volatility Will Always Exist
Happy Saturday to you,
Welcome to the 15th edition of The Rational Investor Newsletter.
Today’s quote comes from Morgan Housel’s new book Same as Ever. It’s filled with story after story drawing connections back to investing and investor behavior. It’s a really enjoyable read and I highly recommend it if you haven’t already bought it.
In today’s quote, Housel makes it clear why volatility has always been present and always will be in such a simple and easy-to-understand way that only he can do.
Onto the main event…
Here’s Morgan Housel on Why Volatility Will Always Exist:
Imagine a world where the stock market never went down. Market stability is all but assured, and stocks only go up.
What would you do?
You would buy as many stocks as you possibly could. You would mortgage your house and buy more. You’d consider selling a kidney and buy more still. That would be the reasonable thing to do!
And in the process, the price of stocks would get bid up. Their valuations would become ever more expensive. They would get so expensive that their future return prospects would decline close to zero.
And at that very moment, the seeds of breakdown would start to sprout.
The higher stock valuations become, the more sensitive markets are to being caught off guard by life’s ability to surprise you in ways you never imagined.
…
With assets priced high and no room for error, markets would be hanging on by a thread, crushed at the very first sniff of anything less than perfection.
The irony is that when markets are guaranteed not to crash—or more realistically, when people think that’s the case—they are far more likely to crash.
The mere idea of stability causes a smart and rational movement toward bidding asset prices up high enough to cause instability.
Stability is destabilizing.
For all the folks out there who are wondering if we’ll ever live in a world without market volatility, I think you now have your answer: As long as humans are human, it’s impossible.
Thanks for reading. I’ll be back again next week with more timeless wisdom from great investors.
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