Insights on market volatility and the rewards of patience

“The stock market is designed to transfer money from the active to the patient.” – Warren Buffett

We all know that old adage, “The only certainty is uncertainty,” and it especially rings true in financial markets where the landscape is continually shifting and often in unpredictable ways. Record-breaking returns coupled with staggering valuations have become a familiar occurrence in recent years, which has raised the question of the sustainability of these returns. The impact of geopolitical factors, such as the election of US President Donald Trump, further compounds the uncertainty, as seen with the latest introduction of tariffs for Canada, Mexico and China, increases risk and volatility into the mix.

Speculation and its consequences

Speculation is an inherent feature of stock markets. Investors often make decisions based on future expectations rather than present realities, driving prices to levels that may not be justifiable by traditional valuation metrics. This speculative behaviour can lead to bubbles, as was evident during the dot-com era and the housing market crisis. When the bubble bursts, the resulting market corrections can be severe, causing significant financial losses for those who were caught up in the frenzy.  It was the well-known investor, Peter Lynch, who famously said, "Far more money has been lost by investors preparing for corrections or trying to anticipate corrections than has been lost in corrections themselves." Lynch’s point underscores the futility of trying to time the market. Instead, he advocated for staying invested through the ups and downs, trusting in the long-term growth of quality assets.

A striking example of this principle in action is the COVID-19 pandemic. In early 2020, global markets plummeted as fear and uncertainty gripped investors. The S&P 500 fell by nearly 34% in just over a month. Many investors panicked and sold their holdings, fearing further declines. Yet, those who held on, or even took the opportunity to buy, were eventually rewarded. By August 2020, the S&P 500 had not only recovered but reached new all-time highs. Similarly, the Johannesburg Stock Exchange (JSE) hit new highs by 2021 with double digit returns over 20%. The lesson here is that uncertainty is inevitable, but patience often pays off.

The role of patience in investing

In such a volatile environment, Warren Buffett's wisdom becomes pertinent. Patience is a virtue that can shield investors from the whims of short-term market fluctuations. While active trading might seem lucrative during bull markets, it often leads to substantial losses during downturns. Conversely, patient investors who adopt a long-term perspective are more likely to weather the storms and benefit from the overall upward trend of the market.

This principle holds true not only for global investors but also for those in South Africa. The JSE, like its international counterparts, has experienced its share of ups and downs. However, investors who have maintained their positions over the long-term have generally seen favorable returns. For instance, an investor who entered the South African stock market 20 years ago would have reaped considerably higher benefits compared to someone who invested just 3 years ago as is illustrated below. An investment of R10 000 invested over 3 years generated a return of 9% p.a., while the same investment invested for 20 years generated a return of 13% p.a. as at 31 December 2024. 

Source: Morningstar and Nedgroup Investments. Data as at 31 December 2024

The impact of geopolitical factors

The newly elected US president, Donald Trump, and the era of Trump 2.0 brings a new wave of uncertainty to global markets. Trump’s policies, ranging from tax cuts to tariffs, has far-reaching implications that affect not only the US economy but also global trade dynamics. An article in the Financial Times titled "Dollar surges as Donald Trump's tariffs shake markets," highlights the significant impact of the tariffs introduced by the Trump administration.

South African investors are not insulated from global trends and have to navigate this volatile landscape. The increased risk and volatility make it challenging to predict market movements, underscoring the importance of a patient and measured approach to investing.

Historical perspective: We've seen this before

The past few years, US stock market valuations have been a topic of concern, with metrics like the price-to-earnings (P/E) ratio at its highest level in 20 years. However, we have seen this before. During the dot-com bubble of the late 1990s, US valuations reached similarly high levels. While the bubble eventually burst, leading to a significant correction, those who remained invested in quality US companies saw their portfolios recover and grow over the following decades.

Similarly, during the 2008 Global Financial Crisis (GFC), the S&P 500 plummeted by 57% from its peak but by 2013, the S&P 500 had fully recovered and by 2021, it had more than quadrupled from its 2009 lows. This demonstrates the importance of patience and a long-term perspective, even when valuations appear high.

Source: LSEG Datastream and Nedgroup Investments

The reward of patience

Patience in investing is not about blind optimism or ignoring risks. It is about recognising that markets are cyclical, and that short-term volatility is a natural part of the journey. It is also about understanding that time in the market is more important than timing the market. Consider the following evidence:

1. Compound growth: The power of compounding is one of the most compelling reasons to stay patient. Reinvested dividends and long-term capital gains can turn modest investments into substantial wealth over time. For example, R10 000 invested in the FTSE JSE ALSI would have grown to R124 250 over a 20-year period. That is growth of 13.4% per annum.   

2. Recovery is inevitable: While no one can predict when a downturn will end, history shows that markets have always recovered. The Great Depression, the dot-com crash, the 2008 GFC, and the COVID-19 pandemic all tested investors’ resolve, but each time the markets eventually rebounded.

3. Emotional discipline: Patience helps investors avoid emotional decision-making. Selling during a downturn locks in losses, while staying invested allows for recovery. As Warren Buffett once said, "The stock market is a device for transferring money from the impatient to the patient."

The stock market, with its inherent uncertainty and volatility, can be a daunting arena for investors. However, the sage advice of Warren Buffett and other successful, well-known investors serves as a reminder that patience is a powerful tool in the world of investing. Taking a long-term perspective and remaining steadfast in the face of the inevitable market fluctuations is crucial for investors to reach their investment goals. Ultimately, the stock market is indeed designed to transfer money from the active to the patient, rewarding those who have the foresight and discipline to stay the course.