Stock Market Volatility: Why Short-Term Drops Are the Price of Long-Term Wealth
If your gut dropped when the U.S. stock market fell just shy of 13% in over two days this past week, you’re not alone.
The harsh truth of markets is:
Volatility is the price you pay for higher returns - it’s a feature of the system, not a bug.
Stocks represent the aggregate of investors' expectations of companies current and future profits discounted to the present to form the stock price.
This brings to light two ideas:
Long-term returns belong to those with resilient portfolios.
Wealth is built by those who stay the course when others can't.
Ben Graham has said: “The stock market is a voting machine in the short term and a weighing machine in the long run.”
& it’s true.
But what does that really mean?
In the short term, markets respond to market events - both company specific and market specific that’s compared to existing expectations.
In Q1 of 2025, Nvidia reported an impressive 78% year-over-year increase but the stock price fell by 8.5% following the announcement.
Why?
It wasn’t enough to have 78% YOY growth or beat the EPS expectations by 5.95%.
Investors expected more.
And those expectations were embedded in the existing stock price so when earnings didn’t beat by more than expected (along with additional updates and insight from the earnings announcement) investors sold shares because they didn’t feel as confident in Nvidia’s ability to meet existing expectations.
In the short-term, market participants are voting with their dollars about expectations that tend to be reactive to events in the near term.
In the long-term, as Graham noted, stocks are a weighing machine.
Meaning, investors care more about the intrinsic value of the company - less concerned about short-term events and more concerned around cash flow, competitive advantage, growth, durability, and valuation.
Markets process billions of trades each day, and within that activity lies collective insight that, over time, trends toward rational outcomes.
It wouldn’t be rational for a unprofitable company with poor earnings growth and a shrinking market share to provide investors with strong long-term positive returns (ex: Gamestop)
When investing - it’s important to make a distinction between gambling and investing for more reliable and consistent long-term returns.
One looks to make money quickly, the other looks to make money slowly.