On July 28, 2006, USA TODAY ran an article in its Money Section entitled, "Stocks' Bumpy Ride is Scaring Off Investors." Three days later, it ran another article with the headline, "Investors Search for Direction in Market Swings." Both of these articles hit the mark because they reported exactly what we have been seeing. How bad is the situation?

As far as the bumpy ride and investors' search for direction goes, we know all about these issues because we have been writing about them all year long. This past week was no exception with a swift change in direction on two big up days, and a reversal day today. So what about volatility? The latter article cited above displayed a bar chart showing that the S&P 500 Index moved 1% or more on 125 days in 2002. This number declined steadily each year after 2002, reaching 30 days of 1% or more movement last year. As of today, there already were 24 days with S&P 500 moves of 1% or more this year.

A better way of examining volatility is to look at an All Daily Graph of the S&P 100 Volatility Index, VXO. You may learn more about the VXO by reading my essay of 11/07/03. This graph shows that the VXO peaked at $50.48 on July 23, 2002, then worked its way down to a low point of $9.47 last year on July 20th. The largest spike since then, $22.25, occurred on June 13, 2006, the day the most recent downturn hit bottom. When one compares today's VXO levels to those of the past, one would have to conclude that current volatility is still low. However, it has been increasing from the low point, and therefore, has risk.

I had read that the recent downturn was caused by traders of commodities, currencies, bonds and stocks who wanted to reduce risk as inflation and interest rates were rising around the world. I can accept this and consider it to be a normal economic risk that comes with the business of investing. However, we now have a renewed awareness of abnormal geopolitical risk. It's harder for me to accept this type of risk and I believe it deserves special attention.

The first article cited above deals primarily with normal, economic risk and quotes experts' advice to, "Stay the course and just hang on." This advice is reinforced by quoting Richard Bernstein, chief investment strategist at Merrill Lynch, who reminds investors that a simple risk-reduction tool is time. An accompanying bar chart shows that the chance of losing money when investing for one day is 46%. This chance decreases steadily until it reaches 0% after ten years. The article also says that "A study by Ibbotson Associates showed that an investor with a portfolio that included a mix of large-cap stocks and U.S. government bonds never had a negative return in any rolling 10-year period dating back to 1926."

I have seen such studies before and I believe them to be true. However, I don't think a buy and hold strategy is the complete answer to mitigating risk. Next week, I'll write more about Risk, Patience and Reward.

MICROSAUSAGE.
After getting beat up by analysts for the last year or so Microsoft finally decided to use more of their enormous cash hoard to buy back more stock. (See my essay of 02/18/05.) $20 billion was earmarked for a "Dutch auction" and $20 billion for their long-term repurchase program. Today it said that only $3.8 billion worth of stock was tendered in the Dutch auction. So they will add the unused portion of the money to their long-term program which should be completed by June 2011.

It seems to me that Microsoft could spend a whole lot more on stock repurchases over the next five years. $36.2 billion to those guys is just Microsausage.