Warren Buffett challenges the conventional view of a stock’s beta as a measure of risk. Beta, which measures a stock’s volatility, is often used by investors to assess risk, with the belief that high beta stocks carry more potential for both gain and loss. However, Buffett disagrees with this approach.
At the 1994 Berkshire Hathaway Annual Meeting, he explained that volatility is not an accurate indicator of risk. He pointed out that financial markets have adopted beta as a popular measure of risk, but for him, it’s irrelevant.
“It became very fashionable in the academic world, and then that spilled over into the financial markets, to define risk in terms of volatility, of which beta became a measure, but that is no measure of risk to us,” Buffett said at the 1994 Berkshire Hathaway Annual Meeting. “Interesting thing is that using conventional measures of risk, something whose return varies from year to year between plus-20 percent and plus-80 percent is riskier, as defined, than something whose return is 5 percent a year every year. We just think the financial world has gone haywire in terms of measures of risk.”
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© 2024 David Mazor
Disclosure: David Mazor is a freelance writer focusing on Berkshire Hathaway. The author is long in Berkshire Hathaway, and this article is not a recommendation on whether to buy or sell the stock. The information contained in this article should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results.