Feedback
European Shorting
My Portfolios
Browse Gurus
Print
Email
When Warren Buffett bought shares in the Washington Post (WPO) in 1973, he knew he was getting a steal: With a going market price of less than $100 million and assets that could have been sold “to any one of ten buyers for not less than $400 million,” Warren backed up the truck. As Warren noted in a speech years later, the ironic thing was that academia would tell you that the Post was getting riskier as the stock fell lower and lower:
“Now, if the stock had declined even further to a price that made the valuation $40 million instead of $80 million, its beta would have been greater. And to people that think beta measures risk, the cheaper price would have made it look riskier. This is truly Alice in Wonderland. I have never been able to figure out why it's riskier to buy $400 million worth of properties for $40 million than $80 million.”
There’s a simple answer – it’s not. Businesses have an intrinsic value which is independent of an ever-changing stock price, which brings me back to Mr. Graham’s quote:
“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.”
Reading this quote helped me realize something — beta isn’t just meaningless. On the other hand, it’s a blessing to the investor — the higher, the better. For the investor who is going to be a net buyer of stocks for the next decade, lower equity valuations is a plus; the more they diverge from intrinsic value over the short term, the better. As someone who has been looking to load up on PepsiCo (PEP) stock during this current rough patch, I can honestly say that I would love some volatility, especially to the downside; as a net buyer and owner for the next 10, 20 or 50 years, that’s only logical.
For the intelligent investor, don’t let a bit of volatility shake your conviction; while it may look like risk to the trader, it’s a blessing in disguise to a buyer and an owner.
Subscribe RSS
RSS
Thanks for a nice article. In fact, realizing this, we are working to redefine risk. Warren Buffett has also talked about this in his 2011 letter to shareholders:
"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. Assets can fluctuate greatly in price and not be risky as long as they are reasonably certain to deliver increased purchasing power over their holding period. And as we will see, a non-fluctuating asset can be laden with risk."