The summer of 2015 is ending with a bang not a whimper. Starting with the China Crash in early July, we are now entering the fifth day of sustained volatility in global equity markets. Market volatility of the sort we are experiencing makes for good front-page news headlines, which for many of us can result in more questions than answers.
In the midst of all the noise, we sat down with Burgundy’s Chief Investment Officer, Richard Rooney, for some perspective. We wanted to know how clients should think about the current market volatility in relation to their investment portfolios, and why this most recent bout of downside volatility feels different. Here are his thoughts:
The overarching point is that market volatility has nothing to do with the intrinsic value of companies.
Volatility is the friend of the disciplined investor, but only when it uncovers big discounts to intrinsic value. Over the past couple of years, our quality-value approach was very popular and led to strong absolute and relative returns. The result was very low margins of safety. Recent volatility has returned those margins of safety to more normal levels for this time in the market cycle, but it has not uncovered value that should be aggressively purchased.
It sometimes seems that, like Newton’s Law of Conservation of Energy, the markets have a Law of Conservation of Volatility. You can delay volatility or even reduce it in the short run via monetary policy, but eventually it appears, and the longer you put it off (remember the “Goldilocks Market” of 2003-2007?) the greater it eventually is. We had gone four years without significant volatility in the markets (we recently set an all-time low on some measures of market volatility) so we were overdue for a taste of it.
Please do not hesitate to reach out to us at any time with your questions or concerns. We look forward to talking with you.