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Real Investing Always Ignores Volatility

Here is a definition for risk: a situation involving exposure to danger.

Here is a definition for volatility: liability to change rapidly and unpredictably, especially for the worse.

The definitions can’t be accepted, primarily because they differ depending on where you look.

We can find those definitions on Investopedia, too.

Risk: Risk is defined in financial terms as the chance that an outcome or investment’s actual gains will differ from an expected outcome or return. Risk includes the possibility of losing some or all of an original investment.

Volatility: Volatility is a statistical measure of the dispersion of returns for a given security or market index. In most cases, the higher the volatility, the riskier the security.

Rebalancing, volatility harvesting, reallocation. These are all funny words built on shaky or fully ungrounded axioms.

Risk is the likelihood that the investment in question is bad. It is the numerical value that tells you whether you will lose a significant portion of the capital you put into the equity in question.

Volatility, on the contrary, is just a measure of the “up and down” nature of an equity. In other words, just because something is moving in sharp and large ways, doesn’t mean it’s necessarily risky. Investopedia would have you believe that “the higher the volatility, the riskier the security.”

It is a pseudo-axiom attempting to tell you something about the movement of equity prices, but it will frequently fail to do anything of the sort in practice. If you look at things like bitcoin, they’ve had nearly infinite levels of return since its inception.

If you look at Netflix in 2011, you would have seen a company lose almost 90% of its valuation in under 6 months.

Yet, both of these completely unrelated assets have had astronomical valuation increases over a band of a decade. They were highly volatile, but they were relatively non-risky. That’s because wherever an agent within the system had clear or almost perfectly clear information about the assets, they would have known that there was relatively little to no risk but there was incredibly high volatility.

Why is this the case?

Investing, at its core, is counter-intuition. It requires figuring out the value in an asset before that value is grown to a critical mass. When critical mass occurs, the value of the asset in question is either

  1. fully realized.
  2. hyper-inflated.

We see that with almost all technology companies today. If you “rebalanced” your technology companies in a portfolio and conflated volatility with risk, you would still end up with losses.

When you’re chasing the long tails of value and growth, you can’t step beyond the initial groundwork — especially when the initial groundwork itself relies on incredibly faulty and dichotomous reasoning.

UC Berkeley, mathematics. Los Angeles. Long-time runner. Top writer on Quora, 100M+ total content views. New to Medium. Inquiries:

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