I love stock market volatility and you should too. A calm stock market is bad for most investors in the long run. Here’s why:

Most people are upset when the stock market tanks, especially when it’s over a fairly long period of time. In 2022, the S&P 500 dropped almost 20%. In the moment, losing money admittedly doesn’t feel great. But when you think about it, these periods are necessary for the stock market to have any excess returns. Why?

Well, think about what a stock is: it’s partial ownership of a business which derives its value, at least in the long run, from its cash flow. If the business was certain to produce a set of cash flows, the owner of the stock wouldn’t sell it to you or anyone else unless you offered to pay above what the cash flows were worth (based on discounted cash flow analysis).

It’s only because of the inherent risk in the value of the stock–the uncertainty in what the cash flows and discount rate are–which causes the owner of the stock to sell it to you for a discount to what it’s worth, so to speak. It’s that discount which is why stocks, over time, pay owners a premium for holding them. You are getting paid for taking the risk of the stock tanking in value.

Here’s another way to think about it: let’s say a genie could guarantee that stock prices would never go down again and publicly announced it to the world. What would that do to stock prices today? Well, they would soar immediately to a new peak because owning each stock basically involves no risk. But then anyone who bought a stock after that point in time couldn’t expect to make much–probably the same as treasuries which theoretically involve no risk–because the downside has been eliminated. With the much higher prices, that downside risk elimination is priced in.

Stock price drops like the one we experienced last year remind current stock owners that there’s risk to holding onto their stock and they need to sell it with some expectation of future return in order for someone else to be willing to take that risk.

For that reason, on days when the stock market tanks it’s uncomfortable but I feel better knowing it’s the bad days which make it possible for the good ones later.