When Risk Is Not Risky

How many amateur investors tend to think volatility is risk? Maybe not most, but many do. Why? Because people have told them that is how you measure risk.

Is it risk?

A more enlightened view is that volatility has little to do with risk. Volatility is volatility, the noise around the signal. Noise eventually cancels and the signal remains.

If you think of your investments as money rather than investments, you can become confused. An investment made in a liquid market, can become money if you sell it. Until you do, it’s not money and that leads to the misunderstanding. Something unpredictable is not necessarily risky, it is merely unpredictable.

The idea of volatility as risk has an implicit assumption that no one mentions. That other thought is you risk loss under one condition, “If you sell at this price, then ….”  If you do not intend to sell and may be a buyer at that price, is there any risk? Then what? No real concern. The noise eventually cancels.

The risk is in how you defend yourself, or don’t, from the need to sell. The marekt is the background. If you can meet needs for cash from other sources, there is no volatility market risk.

But don’t be too confident. There is still an insidious risk that awaits.

The risk attached to volatility.

Volatility is not relevant for investors with long time horizons. There are many “day-trading” ideas that are not. The rules are different in that space. A simplifying question.

Cui Bono?  To whom the good? Ask the question periodically. Who will be the winner if you invest?

How predictable is that win?  Volatility is not quite random, but it is close. Day to day prices are unpredictable.

Simple wisdom, You will be wise to avoid investment advice based on volatility.

Sometimes you might have made money, other times not. Failure to keep score is a huge mistake. Yu learn little without a record of the activity. Avoiding volatility trading might not make the most money in a particular short term, but in the long term, it is a way to be less wrong. For many investment approaches that is an advantage.

Volatility based investing seldom has a connection to business values.

Where the risk lives and waits.

Know yourself. Know your task. Know your limits. Know that you don’t need everything now

Some wisdom:

  1. “Risk is what happens when you don’t know what you are doing.” Warren Buffett
  2. “It doesn’t matter if you win or lose, until you lose… then it matters.” Darrin Weinberg
  3. “In a rising market, enough of your bad ideas will pay off so that you’ll never learn that you should have fewer ideas” Daniel Kahneman
  4. “Intelligent, sound investing advice should have two characteristics: It should be simple and it should be boring.” Dan Rockwell
  5. “Knowing what you don’t know is more useful than being brilliant.” Charlie Munger
  6. “The only way to do well over the long term is to ignore the short term” Seth Klarman
  7. “There is as much risk in doing noth-ing as in doing something” Trammell Crow
  8. “Charlie and I have not learned how to solve difficult business problems. What we have learned is to avoid them.” Warren Buffett
  9. “I will tell you how to become rich. Close the doors. Be fearful when others are greedy. Be greedy when others are fearful” Warren Buffett
  10. “The stock market is a device for transferring money from the impatient to the patient” Warren Buffett

New investors can do better if they pay attention to fundamental business values rather than market statistics and macro-forecasting. avoid being  caught up in the sophistication of theories that need little Greek symbols lying on their side.

Reread number 1 and number 4 above.


I help people have more retirement income and larger, more liquid estates.

Call in Canada 705-927-4770, or email don@moneyfyi.com

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