2011 – Year of Volatility

Did you know that the return of the S&P 500 price index for 2011 was 0.00%? That’s right–no change. Nada. The price index, which does not include dividends, was 1257.64 on 12/31/10, and 1257.60 on 12/31/11. OK, so there was a slight change.

We found it very interesting that in a year marked by record volatility in the equity markets, the net change for the average large company stock price was virtually nil. That just seems strange, doesn’t it?

In order to provide some perspective on just how volatile a year it was, consider this:

Total Trading Days: 252

Total Negative Days: 114

Total Positive Days: 138

Total Number of Days Where the Index Moved +/- 2% Intra-Day: 59

Largest Intra-Day Swing: 7.2% on 8/08/11

Top 5 Most Negative Days of 2011 (four were in August):

6.66% 08/08/11

4.78% 08/04/11

4.46% 08/18/11

4.42% 08/10/11

3.67% 11/09/11

Top 5 Most Positive Days of 2011 (three were in August):

4.74% 08/09/11

4.63% 08/11/11

4.33% 11/30/11

3.43% 10/27/11

3.43% 08/23/11

It’s not surprising to us that the most negative days are often followed by some of the most positive days (although not always back-to-back). We’ve seen that many times before. Extreme negative years are often followed by extreme positive years, but it doesn’t always work this way. The bottom-line is that markets are unpredictable. Some people use this as an excuse not to invest, saying that the stock market is too risky and is not a good measure of intrinsic value. If your holding period is less than five years, we would agree that the stock market is too risky. Most of the time, there is no rational reason for company values to fluctuate so wildly from day to day. In the short-run, both institutional and retail investors are guilty of acting based on emotion. This causes stock values to rise too high or fall too low, relative to a company’s actual ability to generate profits.

That’s why we focus on the long-term and you should, too. The long-term value of a company is a function of earnings growth. If a company is able to succeed in the marketplace, it will be rewarded with an increasing valuation over time and, therefore, its shareholders will be rewarded, as well. The hardest part of investing is that sometimes it can take a long time to receive your reward. Be prudent and be patient. These characteristics will help you achieve your goals.

Bonus Fact: The S&P 500 Index delivered zero flat trading days in 2011. Therefore, the year-over-year change for the price index was lower than that experienced on any one single day of trading!