time horizons

Backward Measures of Risk

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Our investing experience over the last two years vividly demonstrates the problem with confusing volatility and risk.

After years of relative stability, a certain security plunged by more than 80% in a few months. The standard model of risk would have you believe that the security was relatively safer at the high price level. And the more the price declined, the riskier it became—according to the standard methods.

Value investors seek the bargains. To them, the lower the price, the better the deal. This is exactly the opposite of the standard model of risk.

The rest of the story is that the security turned on a dime at the low point, and rose back to its original level in the following months. At the very point the standard model of risk viewed this investment in the worst light, it was preparing to embark on a rise of more than 400%.

There is a good reason why people (including professionals) confuse volatility with risk. In the short term, volatility IS risk. If you have wealth to pay the bills due within a few days, you cannot afford to have the value bouncing around from day to day. If it goes the wrong direction, you might not have enough money to pay the bills.

Therefore, whether volatility is risk depends on the time horizon. In the short term, volatility is risk. In the long term, perhaps volatility is opportunity, not risk. We work hard to understand your time horizon so we can get this right for you.

Clients, if you would like to talk about this in more detail, or have other things on your agenda, please email us or call.


The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results.

Value investments can perform differently from the market as a whole. They can remain undervalued by the market for long periods of time.

This is a hypothetical example and is not representative of any specific investment. Your results may vary.

The AMZN Power of Long Time Horizons

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Jeffrey Bezos founded the online retailer Amazon. He built it into one of the most revolutionary and valuable businesses on the planet. We are not here to discuss Amazon as an investment, but there is a key lesson for our clients in his explanation of this success:

“If everything you do needs to work on a three-year time horizon, then you are competing with a lot of people. But if you’re willing to invest on a seven-year time horizon, you are now competing against a fraction of those people, because very few companies are willing to do that. Just by lengthening the time horizon, you can engage in endeavors that you could never otherwise pursue.”

The investment parallel is clear: just by lengthening the time horizon, you can live with the short term volatility that is inherent in the pursuit of long term investment results.

Those with a short time horizon—an insistence that market values be stable day to day or month to month—can generally expect meager returns. Stable values and liquidity both cost a premium, and if you want both you’re not left with much room for returns.

The ‘time horizons’ framework has interesting theoretical corollaries. It seems to us that investor time horizons, and tolerance for volatility, are smaller now than ever before. (This is an opinion based on anecdotal observation, not a fact.) But if this is the case, the competition for long term results is lighter than before.

Another aspect is that if the demand for stability is high, then the price of stability may be high—and the rewards for enduring volatility may also prove to be high since fewer are willing to do it. Again, this is based on our opinion, no guarantees!

By the same logic, we generally believe that investing in far-sighted companies rather than short-sighted companies makes sense. This is not to say that we are interested in pursuing every visionary out there—we know from experience that it is entirely possible to pay too much for a vision of the future, even if it does come to pass. But we are interested in long term results and prefer to invest in companies that share our time horizon.

Clients, we are grateful for you. As a group, you tend to understand living with volatility, and staying focused on the long term. We believe this has been good for you—and for us. Call or email if you would like to discuss your situation in more detail.


The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results.

Investing involves risk, including possible loss of principal.