One of the benefits of professional independence is having the luxury to “read” (often with the help of Audible) more than annual reports, economic releases and sell-side research, that had dominated my reading in the last few decades.
Tren Griffin’s “Charlie Munger, The Complete Investor” discusses in detail the views of Warren Buffet’s partner on numerous topics of interest to investors, including the concept of risk. Investors, allocators, economists etc. tend to define “risk” in statistical terms that one way or another incorporate the concept of volatility of investment returns. Anyone, with access to the internet can learn more about volatility, standard deviations, variances, correlations, betas, factor models and so on, in much more detail than I could discuss on this posting.
For some, like Mr. Munger the one risk that really matters is the risk of losing money. Whether or not the value of one’s portfolio fluctuates appears secondary for such a long-term and disciplined investor.
The problem is that not all of us are long-term oriented and are not disciplined either. For the “common man”, or the so-called “average” investor, volatility is a true risk because, for one, it often triggers action that may be against one’s financial interests. Volatility in other words can trigger decisions that would result in loss of investment performance or loss of principal.
So, instead of aspiring to “beat the market” it may be more beneficial to one’s investment success to focus on reducing the volatility of one’s portfolio.
Compound Interest 