In this edition of Frank Thoughts, Frank takes a look at a concept that has been discussed at length recently: volatility.  Sure, the volatility in the stock market has increased substantially with the current market correction, but as Frank suggests, investors who can withstand heightened volatility can make huge profits in a bull market. 
 

VOLATILITY

Unquestionably, it is the most feared word in the investment world’s lexicon.  It has the connotation of high risk.  Bernie Madoff was able to tap into this emotional fear by providing unending stability.  Year after year he delivered a consistent 12% of tranquil investment performance.  But as I was to learn at a young age stability did not, in the real world, yield good investment performance returns ...  quite the opposite.  Over the years stocks I owned that felt warm, safe and “fuzzy” treated me poorly.  Stocks with high volatility, that occasionally “terrified” me, would often reward with great performance.  It was a lesson I learned from Hyman Adelman.

Hy Adelman was a self-employed oil delivery man operating in Brookline, Massachusetts.  In 1963 he would come into Merrill Lynch every day in his overalls and sit and watch Syntex trade.  Syntex was a small little known drug company, incorporated in Mexico, which had developed a compound from yam roots.  A drug the company believed could prevent pregnancy.  It did. 

In the beginning Hyman invested “a few thousand dollars” in the stock ...  on margin.  In 1963 that was very serious money.   As it moved up and his buying power increased, he bought more … always on margin.   But he never maxed out his loan potential by buying too much.  Which was a very smart move on his part as the stock could move up or down --- 20-30% intraday!   In fact there were many days the stock was “held” for trading two or three hours.  The American Stock Exchange would flash a notice “SYN-Order Imbalance-Trading Held.”  There were even days when it opened for trading in the morning and then was immediately shut down, due to an order imbalance, for the rest of the day.  I remember Hyman leaving the office many times not knowing if he was wiped out … or if the stock might have increase dramatically giving him more buying power to add to his position.   He always accepted the volatility calmly.  The stock rose from $5.75 in January to $227.50 in less than ten months!!!

It would be years later when I would learn about beta.  Simply put, the beta of a stock is a number describing the relation of its returns with that of the financial market as a whole.  Example:  Ford currently has a beta of 2.3.  If on a given day the market goes up 1%, Ford typically would go up 2.3% … and the same on the downside.  Syntex, at the time, probably had a beta of 6-8!  The stock was a dramatic example of volatility.  It was theatrical.  But high beta, or volatility, reflects lack of investor conviction.  That which is perceived as high risk has low and fearful investment risk tolerance.  And that is how the entire stock market is currently perceived.  It is a time when serious money can be made.

Hyman Adelman sold his Syntex stock a year later in 1964 for slightly more than $1,000,000.   He closed his account at Merrill Lynch and walked away in his faded blue Sterling Oil Co. uniform --- a rich man.  Hyman was done.  He understood that in a bull market VOLATILITY was his friend. 
 

FRANCIS PATRICK BOLAND

6-11-10