“Risk on, risk off” sounds like something wise Mr Miyagi would tell Daniel-san before a karate tournament. But right now, global markets aren’t following a disciplined strategy. They’re swinging between risk on and risk off depending on the latest headline. One day risk on. The next day risk off. Driven by escalations, ultimatums, ceasefires, and political signaling.
As I write this, the USA share market has just had a risk-on day. A two-week ceasefire has been agreed following the latest escalation, after President Trump issued another ultimatum to Iran. Markets have rallied accordingly. This volatility feels largely manufactured. Equity markets appear increasingly disconnected from energy markets. When Trump escalates, markets barely react. When he de-escalates the very threat he created, markets celebrate. None of it makes a great deal of sense. Prices are swinging between hope and fear.
But a ceasefire is not the end of a war. In fact, there is every chance one or both sides breach the terms. If that happens, we return to the cold, hard reality that Iran sits in a position of control over the Strait of Hormuz. Everything else is noise layered on top of that reality. This is the market today. Not driven by earnings or valuations but by headlines.
It is very easy to get caught up in the drama. It's very serious and lives are at stake but from an investor perspective, much of it is drama. The escalation, the de-escalation, the ultimatums, the negotiations. It creates movement, but not necessarily value. For long-term investors, there is very little benefit in reacting to this carry-on. The more markets swing day to day, the more tempting it becomes to do something. But activity is not the same as progress.
So who benefits from volatility? Traders and hedge funds thrive on it. Volatility creates opportunity for short-term positioning, leverage and rapid capital rotation. It also rewards those who somehow know the direction ahead of time. When markets swing on political announcements, the advantage naturally shifts toward speed and information. For long-term investors, however, volatility is mostly noise unless it creates genuine mispricing. Short term movements are not where serious long-term investors sit.
This is where perspective matters. In a recent interview, Warren Buffett described the current market decline as “nothing.” He noted that a five or six percent fall is not meaningful and reminded investors that markets have dropped more than 50 percent several times during his career. He indicated Berkshire would only deploy significant capital after a much larger dislocation. In other words, while small moves create headlines, large moves create opportunities.
That patience is reflected in Berkshire Hathaway’s balance sheet. The company currently holds roughly US$370 billion in cash and Treasury bills, around 30 percent of total assets. Buffett is not reacting to volatility. He is waiting for opportunity. That patience stands in contrast to current market optimism. Despite risks at every turn, markets continue to lean toward best-case outcomes. Yet the conflict itself is far from resolved.
The war is not over.
It is entirely possible that Iran consolidates control over shipping through the Strait of Hormuz. If, hypothetically, a toll of around US$2 million per ship were imposed on roughly 100 to 140 vessels per day, that equates to approximately US$70 billion to US$100 billion per year. In the context of the global economy, that is actually a relatively small price to avoid a full-scale energy shock or global recession. But the toll itself is not the real issue. The real risk is control. The longer Iran effectively controls global energy flows, the more likely volatility turns into a genuine economic shock.
The longer the Strait of Hormuz stays disrupted, the more permanent damage to the global economy and the more likely a serious recession becomes. Markets continue treating this like temporary noise. But if the structure of energy supply changes, it isn’t noise. It’s repricing. For long-term investors, the real advantage comes from patience, discipline, and perspective. Being ready for an economic shock that creates genuine mispricing is when the real opportunity occurs.
General Disclaimer: This information is of a general nature only and may not be relevant to your particular circumstances. The circumstances of each investor are different, and you should seek advice from an investment adviser who can consider if the strategies and products are right for you. Historical performance is often not a reliable indicator of future performance. You should not rely solely on historical performance to make investment decisions.