VOLATILITY

“Volatility is the price of admission. The prize inside are superior long-term returns. You have to pay the price to get the returns.” Morgan Housel

"Volatility caused by money managers who speculate irrationality with huge sums will offer the true investor more chance to make intelligent investment moves. He can be hurt by such volatility only if he is forced, by either financial or psychological pressures, to sell at untoward times." Warren Buffett

“Volatility is a symptom that people have no clue of the underlying value.” Jeremy Grantham

"This great emphasis on volatility in corporate finance we regard as nonsense." Charlie Munger

“Opportunities to purchase what we deem to be attractively undervalued companies occur more frequently when stock prices are volatile.” Chuck Royce

“Basically, price fluctuations have only one significant meaning for the true investor. They provide him with an opportunity to buy wisely when prices fall sharply and to sell wisely when they advance a great deal.” Benjamin Graham

“We steer clear of the foolhardy academic definition of risk and volatility, recognizing, instead, that volatility is a welcome creator of opportunity.” Seth Klarman

“Risk is not defined by volatility, but rather ill-conceived investment.” Michael Burry

"Volatility is not synonymous of risk but – for those who truly understand it – of wealth." Francois Rochon

“In our opinion, transient, historic, stock price quotational volatility is not the same as investment risk. Indeed, quite the opposite.” Nick Sleep

"We do not view volatility as risk." Tweedy Browne Co

"Investors should treat volatility as a friend. High volatility permits an investor to purchase stocks that are particularly depressed and to sell stocks when they are selling at particularly high prices. The greater the volatility, the greater the opportunity to purchase stocks at very low prices and then sell stocks at very high prices." Ed Wachenheim

“Volatility is a dear friend of the active, patient, value-sensitive investor.” David Rolfe

“We think short-term volatility should often be viewed as an opportunity to the long-term investor who seeks enduring businesses at reasonable prices.” Christopher Begg

“We are willing to endure a high degree of stock price and portfolio volatility because we believe it allows us to achieve a greater degree of investment performance over the long term.” Bill Ackman

“At Nomad we would rather results were volatile year to year, but maximised our rolling five-year outcome.” Nick Sleep

“If you’re investing for forty years in some pension fund, what difference does it make if the path from start to finish is a little bumpy or different than everybody else’s so long as it’s all going to work out well in the end? So what if there’s a little extra volatility.” Charlie Munger

“The true investor welcomes volatility.” Warren Buffett

"Volatility actually is the opposite of risk. It’s opportunity. But you need to think through and fight some basic human weaknesses.” Jeff Ubben

"We don't believe volatility is a good proxy for risk. In fact, volatility (which we view as an asset to be utilised) is a key component that increases our chances of providing superior returns over time - thus we welcome volatility." Allan Mecham

"I have never thought of volatility as a measure of risk. The investment business tends to think there is some correlation between volatility and risk and I don't think that is true. We are not concerned with price fluctuations and to the extent that the price drops, we can take advantage of that and can buy more of the same thing." Mohnish Pabrai

“You can get lulled to sleep when markets haven’t been volatile, which likely means it’s time to take some chips off the table.” Kevin O’Brien

"Not only doesn't a stock's past price volatility serve as a good indicator of future profitability, it doesn't tell you something much more important - how much you can lose. Let's repeat that: It doesn't tell you how much you can lose. Isn't risk of loss what people most care about when they think of risk?" Joel Greenblatt

“There are many kinds of risks .. But volatility may be the least relevant of them all.” Howard Marks

“Risk is defined differently by different investors. We do not define risk using terms like ‘volatility’, ‘beta’, or ‘tracking error’, all of which stem from the convenient but arbitrary fact that publicly traded equities have constantly changing price quotations daily.” John Neff, Akre

“If you make more money when you are right than you are hurt when you are wrong, then you will benefit, in the long run, from volatility [and the reverse].” Nicholas Taleb

“You can’t overlook the volatility, but you don’t let it push you around in the market.” Boone Pickens

"A tolerance for short-term swings improves our long-term prospects. In baseball lingo, our performance yardstick is slugging percentage, not batting average." Warren Buffett

“Tolerating short-term volatility is how we get to enjoy long-term gains.” David Poppe

“Accepting the risk of interim volatility is the cost of achieving above average long-term gains. Our protection against volatility is the ‘natural hedge’ in a portfolio of investments whose earnings in aggregate grow steadily and relatively predictably over time.” Bill Stewart

“If you are an investor you can't call yourself that if you are not comfortable with swings. I mean we are in auction driven markets. Auction markets can do all kinds of things and in the near term they can do very strange things and they don't make logical sense.” Mohnish Pabrai

“Volatility is the friend of the unleveraged long-term investor. We much prefer the bumpy road to higher rates of return than a smoother rise to more modest profits” Bill Ackman

"Most investors incorrectly consider volatility to be a risk. These investors thus demand a higher return from common stocks than the deserved return. This error is our opportunity - this is another reason we treat volatility as a friend." Ed Wachenheim

“Look at market fluctuations as your friend rather than your enemy; profit from folly rather than participate in it.” Warren Buffett

“One of the great lessons on the crisis was learning the difference between volatility, which most people perceive as risk, and a permanent impairment of capital, which is what we believe is risk.” Matt McLennon

“While many investors think of volatility as synonymous (or nearly so) with risk, we take a different view. Rather than avoid volatility, we see the challenge of managing risk as trying to take advantage of the market’s movements—an essential skill for any successful active manager.” Chuck Royce

“Volatility can be a good signal for us, since more volatile mark-to-market prices generally means that the particular stock is inefficient – investors are unsure of how to forecast / value the company, and thus don’t know where it should trade. If we’re able to obtain a differentiated view in these situations, the upside can be quite large.” Fred Liu

“Risk is a far more complex consideration than merely the simple but widespread notion of volatility.” Paul Singer

“Pick any Company you want – the price is very volatile over short periods of time. It does not make sense to me that their values are nearly as volatile as the prices and therein lies what should be a great opportunity.” Joel Greenblatt

"Volatility is our friend. Volatility has nothing to do with risk." Mohnish Pabrai

"Volatility can be a friend of the value investor – it provides more situations where stocks significantly diverge from their intrinsic value and can allow us to turn our capital faster." Ricky Sandler

"Volatility is terrific. What we don't want is the permanent loss." Wally Weitz

"I don’t know the risk in See’s Candy as measured by its stock volatility because the stock hasn’t been outstanding since 1972. Does that mean I can’t determine how risky a business See’s is, because we don’t have a daily quote on it? No. I can determine it by looking at the business, and the competitive environment in which it operates, and so on." Warren Buffett

"If we insist on a significant margin of safety at the time of purchase, above-average volatility may well provide above-average returns. Rather simple, when you ponder it a while." Frank Martin

"I think volatility is so widely used as a risk-metric simply because it is easy to measure, not because it is a good gauge of risk of permanent loss of capital. Downside volatility is merely one aspect of risk, not necessarily the most important, while upside volatility isn't much of a risk at all - unless you are short." Joel Greenblatt

"Another important point: the significant volatility of the market is often perceived negatively by many investors. It’s actually the contrary. When we see stock prices as ‘what other people believe the company is worth’ rather than the real value (at least in the short term), these fluctuations become our allies in our noble quest for creating wealth. Instead of fearing them, we can profit from them by acquiring superb businesses at attractive prices." Francois Rochon

“I certainly view volatility as my friend. Volatility is on sale because 99% of the institutions out there are doing their best to avoid it.” Michael Burry

"Financial academics define risk as volatility. That may be fine for theory, but for those of us who live in the real world, we define risk as permanent loss of capital. The likelihood of risk using our definition is always highest at the point where the general perception of risk is lowest." Christopher Bloomstran

"When people do try to measure investment risk, they typically assess the historic volatility of an investment compared to that of the overall market (known as beta), which derives from capital asset pricing theory. We consider the concept of beta to be irrelevant, both because volatility is not the same thing as risk and because one cannot reliably project past share price patterns into the future (It is, of course, fortunate for us that others remain so misguided)." Seth Klarman

"It doesn’t make any difference to us whether the volatility of the stock market, you know, is — averages a half a percent a day or a quarter percent a day or 5 percent a day. In fact, we’d make a lot more money if volatility was higher, because it would create more mistakes in the market. So volatility is a huge plus to the real investor." Warren Buffett

"If you want to start talking volatility equals risk, sharpe ratios, beta and gamma, the Greek alphabet, we're not a good match for you." John Phelan

"Volatility is not part of our analysis of risk; rather we view it as an opportunity generator. What we say for our purposes is that risk involves the exposure of permanent loss of capital." Chuck Akre

"In the first place it has been known for decades that there is no correlation between risk, as the academics define it, and return. Higher volatility does not give better results, nor lower volatility worse. Volatility is not risk. Avoid investment advice based on volatility." David Dreman

"How can professors spread this [nonsense that a stock's volatility is a measure or risk]? Ive been waiting for this craziness to end for decades. It's been dented, but it's still out there." Charlie Munger

"Because we focus on value instead of price, we do not consider short-term stock market volatility a risk. Instead, we define risk as long-term value destruction. For today’s investors, the potential loss of purchasing power on the dollars they save is one of the largest value-destroying risks they face." Chris Davis

"In my view, the best tools for dealing with volatility are preparation, intellectual humility, and the discipline to stick with ideas that are right in your wheel house." Allan Mecham

"I may not care about volatility but the reality of having temporary capital is the volatility matters." Mohnish Pabrai

“We care less about volatility than others and try to find limited partners who are like-minded.” David Abrams

"Our belief is volatility is a risk only in the short run. If you have an obligation in a year, such as buying a house, you probably don't want to speculate with that cash. If it's 3 or 5 years you have the ability to put that money to work. Volatility is not in our lexicon basically in terms of risk." Chuck Akre

"We love volatility. We try to appraise a company's business value and its likely growth path. The stock price should be loosely tethered to the business value over time, but volatility around that value gives us the chance to buy at a discount and sell at a premium." Wally Weitz

“As an investor, you love volatility. Not if you’re on margin, but if you’re an investor you aren’t on margin. And if you’re an investor, you love the idea of wild swings because it means more things are going to get mispriced.” Warren Buffett

"Theory accepts volatility as the indicator of risk, because data on volatility is quantifiable and machinable. But people in the real world don't worry about volatility or demand a premium return to bear it; what they care about is the likelihood of losing money. Because that likelihood can't be quantified, risk is best handled by experienced experts applying subjective, qualitative judgement that is superior." Howard Marks

“We pay no heed to the day-to-day volatility of our portfolio, and actually prefer the prices of our stocks drop and drop until our portfolios are full up.” Christopher Bloomstran

"Stock price volatility is not risk. Instead, stock price volatility is a tool that can be used to lower risk for disciplined, long-term investors." CT Fitzpatrick

"In business schools, volatility is almost universally used as a proxy for risk. Though this pedagogic assumption makes for easy teaching, it is dead wrong: Volatility is far from synonymous with risk. Popular formulas that equate the two terms lead students, investors and CEOs astray." Warren Buffett

"Till this day, the vast majority of individual investors and institutional investors still follow investment philosophies that are based on "bad theories." For example, they believe in the efficient market hypothesis, and therefore believe that the volatility of stock prices is equivalent to real risk, and they place a strong emphasis on volatility when they judge your performance. In my view, the biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital. Not only is the mere drop in stock prices not risk, but it is an opportunity. Where else do you look for cheap stocks?" Li Lu

"The riskiness of an investment is not measured by beta (a Wall Street term encompassing volatility and often used in measuring risk) but rather by the probability – the reasoned probability – of that investment causing its owner a loss of purchasing-power over his contemplated holding period." Warren Buffett

"We do not subscribe to the widely held view that share price volatility is synonymous with risk. If share price volatility equaled risk, then investing in private companies would be nearly risk free simply by virtue of there being no active price quotation for the shares! Instead, we view the risks of any public equity investment through the same lens as we would a private equity investment: the business, the people, the reinvestment, and the valuation." Chuck Akre

“Private investments, of course, have the same underlying risk and inherent volatility as public investments – though because they are not publicly traded, their intermittent and privately determined appraisals may make them appear to be less volatile.” Seth Klarman

“As disciples of value investing we evaluate opportunities carefully and thoroughly in anticipation of deploying capital at great entry points when market gyrations create attractive valuations. We believe volatility should be harnessed rather than feared and that such conditions create exploitable dislocations and forced selling. For us, highly volatile market conditions create an embarrassment of riches. This generates excitement within our team as such episodic riots often result in cascading sell orders from those other institutions that conflate volatility with risk." AzValor

"Other than maniacal pricing, worrying about the volatility of the stock price of fundamentally strong businesses is damaging to performance and success." Bill Smead

"We continually emphasize that volatility isn’t a useful measure of risk. Unfortunately, most investors – professionals, investment committees and individuals alike – respond to volatility. But that’s like using a thermometer to measure the temperature outside. The thermometer may tell you it’s 70 degrees today, with an ocean breeze keeping things cool. It tells you absolutely nothing, however, about tomorrow, next week or even next year on this same date. It could be hotter or colder – by a lot or a little. It could rain." Steve Romick

“Finance departments teach that volatility equals risk. Now, they want to measure risk, and they don’t know any other way. They don’t know how to do it, basically. And so they say that volatility measures risk.” Warren Buffett

“When volatility hits, at worst we hold through, and at best we exploit it. Simply put, our stocks may be volatile at times, but our businesses, in general, are not.” Yen Liow

"Volatility is not a measure of risk.... Risk comes from the nature of certain kinds of businesses. It can be risky to be in some businesses just by the simple economics of the type of business you’re in, and it comes from not knowing what you’re doing. And if you understand the economics of the business in which you are engaged, and you know the people with whom you’re doing business, and you know the price you pay is sensible, you don’t run any real risk." Warren Buffett

“I try not to lose sight of the fact that equity investors get paid for tolerating volatility. Stock market returns in the US have hovered around 10% annually for a century. That’s an impressive rate of return and it exists partly because periodic recessions and crises cause excruciating pain, terrify people and serve to keep equity prices low relative to the future prospects of American business. This is worth remembering: over the past 100 years, the US stock market has usually been attractively priced relative to future returns.” David Poppe

“Loss aversion is a deeply embedded human trait; thus it’s only noremal to feel uncomfortable when market prices move lower. While volatility can cause uneasiness, we feel that it often creates the possibility for improved expected returns by increasing per share ownership through direct purchases and company share buybacks. We think short term volatility should often be viewed as an opportunity to the long-term investor who seeks enduring businesses at reasonable prices” Christopher Begg

“Predicting is intrinsically dangerous, especially if it’s in the form of believing that it can be measured in terms of historic volatility. All we can do is explore the possibilities. Keeping an open but prepared mind seems to be the best policy.” James Anderson

“The great thing about the stock market that stock prices fluctuate to a much greater extent than the underlying business values. I have a chart that I've updated over the years that has the top 10 mega caps in the S&P 500. It shows you that in any given year, even the largest stocks in the market, the top 10 most valuable and most well followed companies, have stock prices that fluctuate by 50% or so.” John Huber

“Let me put it this way: as long as the odds are in our favour and we're not risking the whole company on one throw of the dice or anything close to it, we don't mind volatility in results. What we want are the favourable odds. We figure the volatility over time will take care of itself at Berkshire.” Charlie Munger

“There is no strong agreement on what causes volatility to fluctuate or even on what causes it in the first place. We can say that volatility sets in when the unexpected happens. But that is of no help, because, by definition, nobody knows how to predict the unexpected. On the other hand, not everyone worries about volatility. Even though risk means that more things can happen than will happen—a definition that captures the idea of volatility—that statement specifies no time dimension. Once we introduce the element of time, the linkage between risk and volatility begins to diminish. Time changes risk in many ways, not just in its relation to volatility.” Peter Bernstein

“I haven’t written much about volatility, other than to say I strongly disagree with people who consider it the definition or essence of risk. I’ve described my belief that the academics who developed the Chicago School theory of investment in the early 1960s (a) wanted to examine the relationship between investment returns and risk, (b) needed a number quantifying risk that they could put into their calculations, and (c) undoubtedly chose volatility as a proxy for risk for the simple reason that it was the only quantifiable metric available. I define risk as the probability of a bad outcome, and volatility is, at best, an indicator of the presence of risk. But volatility is not risk. That’s all I’m going to say on that subject.” Howard Marks

Further Reading:
‘Fees vs Fines,’ Morgan Housel, Collaborative Blog, 2019.