Warren Buffett on Volatility & Beta
I recently read an excellent collection of articles on the subject “Investment Myths” from the latest edition of ‘Wealth Insight’ – one of the best investment magazines I regularly read – published by valueresearchonline.com
One of the myths was about staying away from falling markets and high volatility.
In this topic I came across an excellent piece of information told by Warren Buffet.
Given below the text as is from the magazine.
The volatility nonsense
Volatility or beta of a company is one of the latest “in-things” some investors like to look out for. Lower beta equals less risk goes the rationale.
However, Buffett considers the conventional wisdom on volatility nonsense.
“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 per cent, 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 that 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” (Berkshire Annual Meeting, 1997).
According to Warren Buffett, it is not the price that matters, but the value that a particular company creates. In a Q&A with six business schools in 1999, Buffett explained, “When I do invest, I don’t care if the stock price goes from $10 to $2 but I do care about if the value went from $10 to $2”
Here’s some advice to those investors who keep on worrying about market fluctuations. “We want things to go down, but I have no idea what the stock market it going to do. I never do and I never will. It is not something I think about at all. When it goes down, I look harder at what I might buy that day because I know there is more likely to be some merchandise there to use my money effectively in” (Lecture at the University of Florida Business School 1998)