We talk a lot about volatility here. We measure it with the VIX, we stress about it during earnings season, and we pay expensive fees to hedge funds promising to dampen it. But rarely do we talk about the internal mechanism required to survive it.
Today’s wisdom comes from Myron Scholes. Yes, that Scholes—the Nobel laureate of Black-Scholes fame. While his mathematical models attempted to price risk and options, his philosophical take on the relationship between volatility and time offers a profound lesson for the individual investor trying to navigate a chaotic world.
The Wisdom Bite:
"Everything in life is volatility times time. As volatility increases, time compresses. But what we care about is the validity of the fixed point. If we lose it, everything in the past becomes meaningless."
When Time Compresses
"As volatility increases, time compresses." Anyone who lived through the GFC in 2008, the Covid crash of 2020, or even a sudden flash crash knows this feeling viscerally. During a market panic, a day feels like a month. A week feels like a decade. You check your portfolio at 9:30 AM, and by 10:00 AM you have aged five years.
In these moments of compressed time, our biological wiring goes haywire. We are programmed for survival, which means "fight or flight." In finance, that translates to "sell everything" or "buy the top" in a FOMO frenzy. We lose our ability to think about the long term because the short term has become so loud, so violent, and so consuming. The "long run" suddenly shrinks to the next five minutes.
The Necessity of the Fixed Point
Scholes mentions the "validity of the fixed point." For an investor, this "fixed point" is your Investment Policy Statement (IPS), your core philosophy, or your "North Star." It is the pre-commitment you made when the skies were clear and your heart rate was resting.
If you don't have a fixed point—if you don't know why you own what you own, or what your time horizon actually is—volatility will wash you away. You will become the "six-foot-tall man who drowned crossing the stream that was five feet deep on average." You drown because you panic in the deep spot, losing your footing because you forgot where you were trying to go.
The Financial Takeaway
If you lose your fixed point, "everything in the past becomes meaningless." All the years of disciplined saving, all the dividends reinvested, all the prudent decisions—they are vaporized in one moment of panic-selling at the bottom.
You cannot predict the storm. We’ve established that forecasting is a "fool's errand." But you can build an anchor. Before the next crisis hits (and it will), define your fixed point. Is it a specific retirement date? Is it a commitment to own high-quality businesses forever? Write it down. When time compresses and the noise becomes deafening, look at the fixed point, not the ticker tape.
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