Few days ago I wrote a post about what was supposedly my risk profile as an investor. I mentioned in that post that the mainstream perception of risk is quite different to the one I had. Which is the perception I have?
My perception of risk is 100% shaped by that of Benjamin Graham, and so well described by Warren Buffett several times. I looked for a good example in the internet that I could quote and refer you to, here it is:
Finance departments believe that volatility equals risk. They want to measure risk, and they don’t know how to do it, basically. So they said volatility measures risk. I’ve often used the example of the Washington Post’s stock. When I first bought it in 1973 it had gone down almost 50%, from a valuation of the whole company of close to $170 million down to $80 million. Because it happened pretty fast, the beta of the stock had actually increased, and a professor would have told you that the company was more risky if you bought it for $80 million than if you bought it for $170 million. That’s something I’ve thought about ever since they told me that 25 years ago and I still haven’t figured it out.
If you want to read more about it and other related issues, take a look at the website from which I got this quote, Buffett FAQ.