Value Investor?

[swakoo]

Unknown Unknowns are the scariest part of it all.
In a lot of cases, there is no way of preempting it and as some cases have proven that even the safest of safe can fail. (And never recover).

It's a case of the more I learn, the less I realize I know. Only way of eliminating this risk is to diversify sufficiently and not to place a large portion of you wealth into something you have no control over.

I concur on the need of diversification, as a hedge to "Unknown Unknowns" and also mistakes.

The quest now is, what is the "sufficiently"?

Is diversify to 10 stocks of different sectors sufficient? Or we need to diversify into 100 to suffice? etc. etc.

If we invest in stocks, reits or bonds (no matter how many of these we invest in), we are investing in something we do not have control over, unless we are the controlling stakeholder.

So if control is a determining factor in sufficiency of diversification, then there is a need to invest directly in some hard assets.

[CityFarmer]

Unknown Unknowns are the scariest part of it all.
In a lot of cases, there is no way of preempting it and as some cases have proven that even the safest of safe can fail. (And never recover).

It's a case of the more I learn, the less I realize I know. Only way of eliminating this risk is to diversify sufficiently and not to place a large portion of you wealth into something you have no control over.

I concur on the need of diversification, as a hedge to "Unknown Unknowns" and also mistakes.

The quest now is, what is the "sufficiently"?

Is diversify to 10 stocks of different sectors sufficient? Or we need to diversify into 100 to suffice? etc. etc.

If we invest in stocks, reits or bonds (no matter how many of these we invest in), we are investing in something we do not have control over, unless we are the controlling stakeholder.

So if control is a determining factor in sufficiency of diversification, then there is a need to invest directly in some hard assets.

I don't think the "control" is a determining factor in sufficiency of diversification. I reckon even "controlling stakeholder" is also subjected to uncontrollable market risk(s) e.g. systemic risk.

Sufficiency of diversification, should be determined by a most cost-effective level of risk reduction. Base on conventional wisdom, a diversification of 25-30 stocks, will yield the most cost-effective level of unsystematic risks reduction, with risk defined as price volatility.

Is it so? Has this supported by real performance of value investor gurus? Do we have idea the "cost" involved, and any quantifiable "costing" of diversification? Lot of questions, but no answer yet.

[Temperament]

i think price volatility should never be consider as risk. It's considered as risk only when you are restricted by the time factor or time horizon. Another words you should aim not to be forced to sell due to time. Basically a risk of my money is real lost with only a slim chance to recoup some or worse case of all recoup none; No matter what happens after i buy. Like some S-Chips i had to sell as fast as i could before it is suspended.

[CityFarmer]

i think price volatility should never be consider as risk. It's considered as risk only when you are restricted by the time factor or time horizon. Another words you should aim not to be forced to sell due to time. Basically a risk of my money is real lost with only a slim chance to recoup some or worse case of all recoup none; No matter what happens after i buy. Like some S-Chips i had to sell as fast as i could before it is suspended.

Yes, I agree with Mr. Buffett's view on volatility. It isn't risk, but it is probably the closest proxy of risk. It is still a useful measure of risk in analysis, as stated by Mr. Buffett below. It will be used in my "amateur" research.

----------------
It's nice, it's mathematical, and wrong. Volatility (i.e. standard deviation) is not risk. Those who have written about risk don't know how to measure risk. Past volatility does not measure risk. When farm prices crashed, [farm price] volatility went up, but a farm priced at $600 per acre that was formerly $2,000 per acre isn't riskier because it's more volatile. - Warren Buffett
...

Why We Still Use Standard Deviation
If you've read this far, you might wonder: if I really believe this, then why do I talk about standard deviation as a measure of risk in my free book as well as my free course? I do it for 2 reasons.

First, in general (but not always), risky stocks come with high standard deviations. If you look at J C Penney, for example, its stock price moves up and down quite violently (i.e. has high standard deviations). That's because as J C Penny oscillates between making profit and losing money, the opinion on the company shifts often.

Second, while I believe short term price fluctuations don't matter, I recognize that most people have trouble thinking the same way. Most people do feel anxious when stock prices take a temporary hit, which often causes them to make bad decisions. For example, during the depth of the financial crisis, many people sold their stocks out of fear, though they should have been buying stocks instead.

I don't want to ignore the emotional reality of people, which is why I try to optimize the portfolios in such way that the portfolios don't move up and down very much. That's why I will continue to pay attention to standard deviation, even though quite frankly, I don't care about it much for my own portfolio.
http://www.moneygeek.ca/weblog/2014/08/2...ines-risk/

[Musicwhiz]

Volatility should be equated with opportunity, and not risk, assuming an investor has a clear idea of what the VALUE of a Company is. The newspapers regularly love to equate risk with volatility, with their favourite line probably going "investments which experience high volatility should be viewed as being riskier, as at any one time the price may fluctuate violently". The only effect I see of a share price which gyrates violently is probably to make you wonder why Mr. Market is so emotional about that particular company - but it doesn't change its underlying business characteristics.

Another often mentioned line in the news is - higher risk always equates with higher returns. But wait - you can actually achieve the seemingly impossible "low risk, high returns". Because if an investment is perceived as being risky, then it's more correct to say that people would EXPECT it to have higher returns; in itself a risky investment does not always provide higher returns. This was what Howard Marks spoke about when he wrote about the concept of "risk". On the flip side, those investments which are viewed as being "less risky" may actually generate very high and certain returns because no one expects them to outperform expectations. Such "lower risk" investments are typically viewed as being esoteric, boring or are shunned because they offer a product or service which may be taboo (e.g. funeral services). Expectations are thus low and no one cares about researching the business. This results in low valuations and a "low" share price, but a decent business which generates good cash flows throughout business cycles would arguably provide less risk and higher than normal returns if one bothered to look deeper.

[opmi]

^^ Munger already said investing is similar to Pari Mutuel betting.

http://en.wikipedia.org/wiki/Parimutuel_betting

[specuvestor]

Risk as a volatility is so that academics got a number to pluck in and can output a Eureka number. Like I said people are too obsessed with tech and statistics without understanding what it entails.

Frequently small cap stocks perform far better than CAPM predicts but academics say that it is not the model is wrong but that the market underprices the risk ie volatility.

[CityFarmer]

Risk as a volatility is so that academics got a number to pluck in and can output a Eureka number. Like I said people are too obsessed with tech and statistics without understanding what it entails.

Frequently small cap stocks perform far better than CAPM predicts but academics say that it is not the model is wrong but that the market underprices the risk ie volatility.

Yes, volatility as risk, isn't entirely right, but it is also not entirely wrong. I would say volatility is a good and convenient proxy of risk.

The same argument as NAV isn't intrinsic value, but it is a convenient proxy, as always advocated by Mr. Buffett.

[specuvestor]

The fundamental reasoning between volatility and book value as proxies are not even close

[CityFarmer]

The fundamental reasoning between volatility and book value as proxies are not even close

I am willing to hear more on the argument. Would you like to elaborate?