Thinking about Volatility

Many investors equate volatility with risk. The more an investment swings, the riskier it must be. As a result, investors often seek comfort in cash, bonds, broad diversification, or simply avoiding equities altogether.

At Mad River we have never bought into that notion. We define true risk as the permanent impairment of capital. Equally important is the debasement of currency or the erosion of purchasing power over time, particularly during periods of elevated inflation.

While it may not feel this way during a meteoric rise or sharp selloff, day-to-day and even year-to-year volatility is largely noise to the long-term investor.

What if we viewed volatility as opportunity instead of risk?

CNBC, Bloomberg, and The Wall Street Journal have airtime to fill, headlines to write, and audiences to engage. It's understandable why short-term market movements receive so much attention, even when they have little bearing on long-term business value. Volatility can be a gift to the disciplined and emotionally prepared investor.

Here’s a homework assignment, should you choose to accept it. Take a look at the 52-week highs and lows of companies such as Berkshire Hathaway, Microsoft, Amazon or Alphabet. You may be surprised to find that the range is often 30%, 40%, and sometimes even 50%.

At Berkshire Hathaway’s 2025 Annual Meeting - Warren Buffett’s last as CEO - he remarked: “What has happened in the last 30, 45 days is really nothing… Let’s say Berkshire went down 50% next week, I would regard that as a fantastic opportunity, and it wouldn’t bother me in the least.”

Accepting that concept, and in fact embracing it, is a competitive and sustainable edge to our investment approach. It allows us to remain patient during market declines and, when appropriate, add to businesses we already know well.

Market Structure as a Source of Volatility

Beyond market swings driven by short-term fears, leveraged participants, politics, or macro events, today’s market structure itself creates volatility. Mega-cap stocks, indexation, levered ETFs and zero-day options (0DTE) all drive flows into and out of securities, often for reasons completely unrelated to business fundamentals.

A core investment theme across our portfolios is investing in the businesses that operate securities exchanges in the United States and globally. These are your classic tollbooth businesses earning profits on trading activity, buying and selling. These businesses generate tremendous cash flow, exhibit notable profit margins and actually benefit from volatility. In the exchange business, just as in long-term investing, volatility can be a powerful driver of growth and compounding.

Consistent with human nature, very few investors complain about positive volatility, typically just negative price declines. The next time markets sell off, remember that volatility is nothing to fear, but rather an edge for the long-term prepared investor.

The next time markets decline sharply, it may be worth asking whether the risk is genuinely in the business or simply in the price being quoted today.

We’d love to hear how you think about volatility! Send us a note - conversation is always welcome.