The annual percentage changes of the stock market go up and down more than the actual businesses in it. Similarly the profits of the businesses go up and down more than the economy of which it’s comprised.
40-year standard deviation of annual percentage changes
| Annual change | |
|---|---|
| GDP | 1.8% |
| Corporate profits | 9.4% |
| S&P 500 price | 13.1% |
This can be explained by the role of emotion in investing and is a good reminder that we don’t know what the good news is and what the bad news is.
From Howard Marks' memo The Folly of Certainty.