On Volatility, Patience, and Extreme Success: Great Returns Ain’t for the Faint of Heart

The investor’s chief problem – and even his worst enemy – is likely to be himself.

- Benjamin Graham [1]

The big money is not in the buying and selling…but in the waiting.

- Charlie Munger [2]

The most important part of investing is in the investor’s control: extreme patience.

It is also the hardest part. 

The market is ultimately just a collection of people buying and selling securities, and these same people are subject to behavioral biases and personal incentives. This is why patience is a rarity and volatility is in abundance in stock markets. Volatility, to us, is not risk, yet investors act on short-term volatility as if it implies a significant impairment on the fundamentals of a business. Stomaching volatility is tough when one sees it as a penalty. As Buffett wrote in 19873, an investor “can be hurt by such volatility only if he is forced, by either financial or psychological pressures, to sell at untoward times.” And most do.

Our brains are wired to battle between short-term rewards and long-term goals4, thus causing many investors to be their own worst enemies. Given the choice between short- and long-term risks and rewards, it is often the short-term that will win out and dominate one’s mind and emotions. This is because humans are hard-wired instinctively to prioritize the here and now over the more distant future, even if longer term considerations are of more significance.5 Evolutionarily, instinctual, short-term reactions to immediate potential dangers were far more important for survival than long-term, deliberate planning. In investing, this instinctual behavior is detrimental to long-term returns. 

Framing the right time horizon to address volatility and loss aversion is everything.

In a study by Nobel Prize-winning behavioral economist Richard Thaler, people who were shown distributions of one-year rolling returns for high-volatility, high-return stocks (as an asset class) and low-volatility, low-return bonds (as an asset class) chose to allocate only 40% of their portfolio to stocks. Meanwhile, those who were shown the same data but on a 30-year rolling return basis for high-volatility, high-return stocks and low-volatility, low-return bonds chose to allocate 90% of their portfolio to stocks.6 In other words, the study showed that individuals were willing to invest more in stocks if they saw long-term (rather than one-year) rates of return and thus thought and acted on a multi-decade basis, in-line with their investment time horizons.

Same data, different time horizons, completely different investment decisions.

As investors, we are constantly battling the incentives that encourage us to act upon what we think might happen or change every day, week, month, or every few years, and will inevitably find reasons to “doubt and justify” the sale of any investment. However, as we will explore, nothing in our opinion is more proven to have ensured positive investment performance than stretching one’s time horizon into the decades. Our destinations are ultimately determined by how we handle the inevitable vicissitudes along the path.

To elucidate the difference between the “path” and the “destination,” let’s assume for a second that thirty years ago with perfect clairvoyance you were able to accurately predict, and (even harder) to hold throughout, the concentrated portfolio of three companies which would go on to generate the best returns among the current S&P 500 constituents. A portfolio created three decades ago with equal parts Apple, Cooper Companies, and Monster Beverages that was left untouched thereafter, would go on to generate incredible returns.

Yet the path of this incredible destination was extraordinarily volatile. Within the past thirty years, over any chosen short time period, would have resulted in a wide range of outcomes despite the portfolio consisting of the same three companies: Apple, Cooper Companies, and Monster Beverages. Would you have owned the portfolio when it was down -35% over weeks, -50% over months, and -61% over a year? What would you have to have known to gain comfort to own and hold them with equanimity for 30 years? And was it knowable and trackable? 

Despite the short-term volatility, as seen in the figure below7, as time horizons grow, volatility dampens.8 

Fortunately for our scavenging ancestors, unfortunately for modern investors, we have a built-in cognitive bias whereby we feel the pain of losing money twice as significantly as the joy felt from gaining that same amount.9 We are fundamentally predisposed to avoiding loss. This pain, the fear of loss, felt with different magnitudes at different times for different market participants, leads to action, which leads to volatility, which imparts more psychological pressure to act, which leads to the pain of fear of loss, and the cycle continues.

Volatility hurts. The path to amazing returns with this perfectly executed, three stock portfolio was particularly painful when you consider the fact that for 71% of the days within this 30-year period (!), the portfolio traded below a previous high.

Even the highly diversified S&P 500 has proven to be very volatile.

From June 1948 to June 2023, an investor owning the S&P 500 over any 1-month period would have lost money 36% of the time for the highly diversified S&P 500 and would have lost money 21% of the time over any 1-year period. Yet if that investor extended his or her holding period to think in decades, the probability of losing money dropped to zero, historically. From June 1948 to June 2023, an investor who owned the S&P 500 over any fifteen-year period or greater would have generated a positive return 100% of the time. 10

The range of annualized returns that an investor in the S&P 500 would have experienced has been significantly wider over shorter periods of time. Similar to our three stock portfolio above, as time progresses, returns converge specifically to the returns of the underlying business.

All told, history shows that neither diversification (as defined by the S&P 500) by itself nor knowing the ultimate destination with perfect hindsight (as defined by owning the three best S&P 500 constituents over the past thirty years), would have removed absolute volatility or the probability of a negative absolute return over any shorter period: The only way to truly mitigate volatility and more importantly lower the probability of a negative return has been to have a time horizon that thinks and acts in decades versus months or years.  

Our stay-put behavior at Worldly Partners reflects our view that the stock market serves as a relocation center where money moves from the active to the patient.11 We are only interested in owning the most knowable, trackable mental model series based on history’s extreme success best expressed in today’s age with equanimity for decades. The big money is made in the waiting. And true long-term owners in an operating business will generate the returns associated with the fundamentals of the business. After all, it is the business that compounds, not the investor. It strikes us as no coincidence that in the long run, the S&P 500 has compounded in line with the earnings growth of the underlying businesses. Most investors use risk and volatility interchangeably, as if it is something to be punished for. Might we suggest an alternative, more patient outlook – volatility is not a fine for being wrong, it is the fee for admission to long-term returns. Great returns are not free – you get what you pay for. 


  1.  The Intelligent Investor by Benjamin Graham pg. 8

  2.  Poor Charlie’s Almanac – Third Edition by Peter D. Kaufman pg. 60

  3.  Berkshire Hathaway 1987 Shareholder Letter

  4. http://pr.princeton.edu/news/04/q4/1014-brain.htm

  5.  https://www.wired.com/2007/03/security-matters0322/

  6.  Benartzi & Thaler (1999). “Risk Aversion or Myopia? Choices in Repeated Gambles and Retirement Investments.”

  7.  Disclosure: This chart (next page) does not represent an actual portfolio or the portfolio managed by the Firm.  Hypothetical performance results do not reflect actual trading. No representation is being made that any portfolio will achieve a performance record similar to that shown. A hypothetical investment does not necessarily take into account the fees, risks, economic or market factors/conditions an investor might experience in actual trading. Hypothetical results may have under- or over- compensation for the impact, if any, of certain market factors such as lack of liquidity, economic or market factors/conditions. There are numerous other factors related to the markets in general or to the implementation of any specific program that cannot be fully accounted for in the preparation of hypothetical performance results.

  8.  We are putting aside these companies’ knowability and trackability for this three-stock example and simply creating an equal-weighted portfolio of the three highest returning stocks over the past thirty years. It is worth acknowledging that these businesses and the industries that Apple, Cooper Companies, and Monster Beverages compete in have changed significantly throughout this period. As such, the attractiveness of this destination-focused investment opportunity looked very different at different moments in time, despite the portfolio consisting of those same three companies. Take Apple – it competes in an industry where the rate of change is significant, and Apple today is dominated by products and services (i.e., iPhones, the app store), which didn’t even exist twenty years ago.

  9.  Tversky & Kahneman (1992). “Advances in prospect theory: Cumulative representation of uncertainty.”

  10.  Source: Bloomberg, Total Return June 1948 to June 2023 (monthly total returns with dividends reinvested and split adjusted)

  11.  Berkshire Hathaway 1991 Shareholder Letter: “Our stay-put behavior reflects our view that the stock market serves as a relocation center at which money is moved from the active to the patient.”

  12.  The Psychology of Money by Morgan Housel


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