Why Planning Matters: A Lesson in Market Resilience
“90% of the stock market is dominated by psychology.” -Andre Kostolany. Often known as Europe’s Warren Buffett, Kostolany was an early market pioneer that defined some of the invisible effects we know to be true today. Kostolany understood market effects that couldn’t be seen with fundamental or technical analysis. He spoke about the master and the dog. The master is the economy, while the dog is the market. The dog may run ahead or lag behind, but it always returns to its master. In simple terms, stock prices may diverge from economic reality, but they always converge to intrinsic value eventually.
With the emergence of specialized products such as zero-day options contracts, the advent of AI, amongst other factors, we’ve seen increased volatility in markets. Increased volatility often leads to a psychological gap amongst investors that causes panic selling, perpetuating a cycle and increasing the size of drawdowns. However, as Kostolany said, the dog always returns to its master.
This isn’t just a simple quote. There’s data to back up Kostolany’s 100-year old claim. During periods of significant market distress and volatility, CNBC commonly airs a special called Markets in Turmoil. As a casual investor, these specials have an impact on psychology and invoke fear. They may cause those with long-term retirement savings to consider selling.
The data says otherwise. Since 2010, the S&P 500 has produced a positive 1-year forward return and total return following each episode of Markets in Turmoil.1 The lesson isn’t that every selloff is a buying opportunity, it’s that psychology often drives markets to further extremes that fundamentals might suggest. Fear can make declines feel inevitable and unavoidable, just as optimism can make gains feel endless.
1Bilello, C. S&P 500 forward total returns following CNBC "Markets in Turmoil" specials. Compound Capital Advisors.
Kostolany’s “master and dog” analogy remains relevant today. The goal for investors should not be to predict when the dog returns, it’s remaining invested long enough to see it return. History suggests that the most important decision is avoiding the emotional temptation to abandon a well-constructed plan at the wrong time.
As always, our focus remains on long-term, intergenerational planning rather than short-term market movements. While volatility is inevitable, successful planning rewards patience, discipline, and a willingness to stay the course when others are driven by fear.