Volatility or Beta, is used by finance professionals as a golden standard to measure the risk. However, the argument here is, it actually does not indicate the risk of an asset. At most it only indicates the risk of “price change” in a certain period, say within a year. The real risk of an asset relies on its fundamentals: its ability to generate future financial benefits (e.g. cash flow, profits, market share).
Warren Buffet provides some details of this argument. Let’s say a low beta asset’s price suddenly dropped due to an unexpected news. As a result, volatility (beta) increased. It seems the asset’s risk increased. However, the asset is actually less risky now (at a lower price with a high beta) than before (at a higher price with a low beta), as long as the underlying fundamentals of the asset stays the same.
So don’t be fooled. Instead, investment opportunities hide in this misunderstanding. We shall still look for the best risk-reward asset, especially those misjudged risks. For example, we can take advantage of those assets without fundamental issues (low risk), but is temporarily having higher volatility or beta (appearing to be risky). In a nutshell, look for the opportunities in the sudden sell-off!
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