Overreactions To Volatility On CNBC

Last weekend, I discussed a wide range of business and political topics with my business partner and a mutual acquaintance. The acquaintance has recently returned from living overseas for several years.

As such, he has a different perspective on some matters, including the popular business cable channel CNBC.

When I mentioned seeing someone on the channel, he quickly dismissed it as a joke outside of America, referring to it as an entertainment channel.

I actually agree with his assessment, and explained that I mostly watch/listen to it for some of the guests, and to learn of breaking news, rather than to pay attention to any- except perhaps 2 or 3- of the network's on-air personnel.

With this conversation in mind, I listened in shock to this morning's discussion among several guests, guest host John Sununu, and the ever-nonsensical 'economics reporter' for the network, Steve Liesman.

The subject was whether recent extreme equity volatility would drive an entire generation of investors away from investing in the equity markets.

As usual, Liesman's views were unsubstantiated and mostly irrational. He breathlessly claimed that seeing 10 percentage point moves daily in individual equity prices might cause current investors to flee that market forever, thus damaging America's capital markets in the process.

Fortunately, the other participants in the discussion were much more level-headed and realistic. One of them, an institutional equity investor, noted that equities are what they are, and maybe some investors shouldn't be buying and holding them, if what they really seek is a bond-like return.

That's a very fair point. In fact, only a few weeks ago, on CNBC, John Bogle, the venerable and sensible founder of the Vanguard Group, noted that his rule of thumb is that people should have their portfolio in fixed income in roughly the same percentage as their age in years. That way, he observed, they rely less on volatile equity returns as they near retirement age, but can take advantage of the long term, superior returns to equities, with greater risk, during the earlier years when those assets can be held relatively passively.

Only once did someone actually note that the current volatility levels are likely to be temporary.

To me, this was the really unfortunate aspect of the entire verbal exchange. Other than Liesman being in it at all.

My partner's and my proprietary equity volatility measure has been recently approaching levels not seen since the crash of 1987, and only a little further below the measure's all-time peak in October, 1929.

However, in both earlier crises, the extreme volatilities only persisted for a month or so. Each prior experience graphically approximates a symmetric, normally-shaped curve. By the following Februarys of 1930 and 1988, equity volatility levels had fallen to levels typically associated with long-run, healthy markets.

The truth is, the current intra-day and inter-day volatilities are unlikely to persist. There are real, identifiable reasons for the former right now. It is institutional selling to prepare for redemptions- of both mutual and hedge funds.

We know, too, that so long as equity values remain uncertain, and suspected to decline further, investors are continuing to move out of equities and onto the market's sidelines, in cash.

If you think about it, disciplined individual investors shouldn't be all that worried. Mutual or index funds relieve investors of the risks of competing with professionals, and individual investors shouldn't be timing the market, anyway.

Further, there are EFT counterparts for most mutual funds, allowing investors to execute sales instantly, rather than only at the market close price.

If current volatility were a constant feature of our equity markets, then, as capital allocators, they could not function. But recent, current, and probably near-term future equity market volatility is a direct function of a confluence of some of the worst financial market and economic conditions in more than 20 years.

Nobody in his or her right mind expects such volatility to either continue indefinitely, or to be the basis on which to choose investment vehicles over long time periods.