Volatility and Cows

(1/5/4):

J. T.  writes: I have been thinking about the Active Trader article, and the prelude Spec-List chat about Volatility. Vic asked the following:

"As mentioned more than 9 months has gone by without a 25-point one-day decline and this compares to a previous 10-year max of 6 months. Why did this happen?
Does it foretell much lower returns in the next year? I would think so."

In the spirit of the List I have to share this story from my childhood. My Grandfather "Pa Pa" was an tremendous man. He taught me more lessons than I can remember, and when questions are brought to my attention his lessons quickly lead to the answer. My Grandfather was a simple man who lived to be 93 in a house that he built with his own two hands. The house had a pot belly stove, a shed lined with bear hides, a tin roof, creek beside, no running water, and an outhouse 30 yards down hill from the house. He never possessed a driver's license and walked everywhere he needed to go. He passed away in '95.

Often when I walked with my Grandfather to town (6 miles) to get a RC Cola and Teaberry Gum he would point out that the Cows were standing up! We would immediately do a turn-about go to the shed, grab our poles and head to the creek. Once there we would cross over the barbwire, pass the Cows, and start grabbing grasshoppers. It never failed we would slay 'em. Stringers full of Red-eye Bass. I would often go by myself, walk two or three miles, pass the Cows lying down catch few grasshoppers and few fish. I would come back to find my Grandfather under the ole' elm tree sippin' tea, swatting flies, chuckling because he knew I was light on the catchin' part. I never knew the correlation between Cows standing and us catching fish for many years. I thought it was the expert fisherman my Grandfather was or the good luck he always had. Later I questioned if it was the Farmer's Almanac and the color coded Fish in each day on the calendar. Then when I turned 18 I asked him finally how in the heck did Cows standing up in the field have anything with us always catching the greatest amount of fish both in quantity and size. He sat me down and explained:

"The fish eat grasshoppers. The grasshoppers are in the field. The Cows move only for two reasons usually, one is to use the bathroom and the other is to
graze. If one Cow gets up then most often all get up. When they get up all the grasshoppers start hoppin'. When they hop some hop into the creek accidentally.
The fish get excited when they see the grasshoppers hoppin' and start to feed. If you can grab hold of a grasshopper, put it on a hook, cast it in the middle
of the hole then you my son are going to catch some fish. If the Cows aren't standing then don't waste your time. Simple as that!"

Now think of the volatility in the markets. Are the Cows just tired from standing and grazing? Have we just caught a mess of fish - 20% plus index
returns 90% breadth? Are the Cows going to lay down for awhile, which yields less fish? I think I am going to just sip on a cup of black coffee this winter,
be selective as to where I cast my line and wait for something to stir up the Cows! God bless my Grandfather. -- J.T.