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Collection: Warren Buffett - #238 'It's Nuts To Measure Risk With Volatility'


Video Link: https://youtu.be/6AGVR_4WoJ4


In this episode, Warren Buffett was asked to give some detail about the concept of risk and how he measure and approach it?


In this episode, you’ll learn:

  • Why Warren Buffett regard volatility as a measure of risk to be nuts?

  • What is risk and how would Warren Buffett measure it?

To check out all Collection: Warren Buffett <click here>

 

[Transcript]

(Source: https://buffett.cnbc.com/2001-berkshire-hathaway-annual-meeting/)

~ Please visit the site above for full video of Berkshire Hathaway Annual Meeting.

AUDIENCE MEMBER 00:00

I’m Bob Kline (PH) from Los Angeles.


Wall Street often evaluates the riskiness of a particular security by the volatility of its quarterly or annual results. And likewise, evaluates money managers by their volatility — measures their risk by volatility, I should say.


And I know you guys don’t agree with that approach. I wonder if you could give us some detail about how you come at the concept of risk, how you measure it, and just in general how you approach risk.


WARREN BUFFETT 00:30

Yeah, we regard volatility as a measure of risk to be nuts.


And the reason it’s used is because the people that are teaching want to talk about risk. And the truth is, they don’t know how to measure it in business.


I mean, that would be part of our course on how to value a business. It would also be, how risky is the business? And we think about that in terms of every business we buy. And risk with us relates to —


Well, it relates to several possibilities. One is the risk of permanent capital loss. And then the other risk is just an inadequate return on the kind of capital we put in. It does not relate to volatility at all.


Our See’s Candy business will lose money — and it depends on when Easter falls — but it’ll lose money in two quarters of the four quarters of the year. So it has a huge volatility of earnings within the year.


It’s one of the least risky businesses I know.


You can find all kinds of, you know, wonderful businesses that have great volatility and results. But it does not make them bad businesses. And you can find some very — you can find some terrible businesses that are very smooth.


I mean, you could have a business that did nothing, you know? And its results would not vary from quarter to quarter, right? So it just doesn’t make any sense to translate — (Laughter) — volatility into risk.


And Charlie, you want to add anything on that?


CHARLIE MUNGER 02:01

Well, it raises an interesting question, which is how can a professoriate that is so smart come up with such silly ideas and spread them all over the country?


It is a — it’s a very interesting question. If all of us felt that — (Laughter)


WARREN BUFFETT 02:22

Charlie, your Dilly Bar’s arrived.


CHARLIE MUNGER 02:24

Oh, good.


WARREN BUFFETT 02:25

Yeah. You’ve heard of getting a second wind.


CHARLIE MUNGER 02:27

Oh, fine.


WARREN BUFFETT 02:28

Thank you. You tip him. (Laughter)


I didn’t think our cracks were that funny. (Laughter)


CHARLIE MUNGER 02:43

Right, right. But I’ve been waiting for this craziness to pass for several decades now. I do think it’s getting dented some. But it’s not passing.


WARREN BUFFETT 03:05

If somebody starts talking to you about beta, you know, zip up your pocketbook. (Laughter) Area 3.

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