Warren Buffett & Charlie Munger: Risk vs. Volatility

more spends from Omaha Nebraska in light of recent stock market volatility could you give us your definition of stock market risk and how does your definition differ from the standard definition finally due to Charlie Charlie his recent account of revelation about jets are you going to rename the indefensible charlie would like to make an announcement on that second point prompted by a low chi we are changing the name of the company plane from the indefensible to the indispensable it was it was Chateaubriand who incidentally was a writer and philosopher in addition to being the father of a a piece of meat Chateaubriand wrote one time I believe that I've done my attribution here that events make more traitors than ideas and if you think about that in terms of Charlie's remark that the purchase of flight safety cuz that Charlie to have this counter revelation and it's it's it's an experience that is duplicated many times in life where people flip over very quickly to a new view based on their new circumstances now what was the first question again was a United Airlines pilot and he has recently been promoted into the 747-400 before he started carrying people like you around for hire he had trained intensively for five weeks 100% of his training was in a simulator there that good so they better be that good they cost us about 19 million but they they are that they're fabulous I mean that did if you think about it I think it's 85 percent of the problems that you can encounter in a plane if you attempted to teach people by actually being in a plane they wouldn't be here anymore so there's you you want to develop the instincts and responses that that can react to eighty Vipers and the problems the only place to learn them as in a simulator and probably the other 15% the best places now let's go back to your first question give it give it to me again the first part was would you define give us your definition of stock market risk and how it differs right a standard definition yeah we don't we don't think in terms of well we we think first in terms of business risk you know we the key to Graham's approach to investing is not thinking of stocks as stocks are part of a stock market the stocks are part of a business people in this room own a piece of a business if the business does well they're going to do all right as long as they don't pay way too much to join into that business so we look at them we're thinking about business risk now business risk can arise in various ways it can arise from the capital structure when somebody sticks a ton of debt into some business and so that if there's a hiccup in the business that the that the lenders foreclosed it can come about just by the nature of the best certain businesses are just very risky back in when there were more commercial aircraft manufacturers Charlie and I would think of making a commercial airplane a big airliner sort of as a better company risk because you would shove hundreds and hundreds of millions of dollars out into the pot before you really had customers and then if you had a problem with the plane you know the company could go there's certain businesses that inherently because of long lead times because of heavy capital investment that basically have a lot of risk and commodity businesses have risk unless you're the low-cost producer because the low-cost producer can put you out of business our textile business was not the low cost producer and we had a fine management and and everybody worked hard we had we had cooperative unions with all kinds of things but we weren't the low-cost producer so it was a risky business the guy who to sell it cheaper than we could made it risky for us so there's a lot of ways businesses can be risky we tend to go into businesses that inherently are low risk and are capitalized in a way that that low risk of the business is transformed into a low risk to the enterprise the risk beyond that is that even though you buy it identify such businesses that you you pay too much for them that risk is usually a risk of time rather than loss of principal unless you get into a really extravagant situation but then the risk becomes the risk of you yourself I mean it whether you can retain your belief in in the real fundamentals of the business and not get too concerned about the stock market the stock market is there to serve you and not to instruct you and that's that's a key to owning a good business and getting rid of the risk that what otherwise exists in the market you mentioned volatility it doesn't make any difference to us whether the volatility of the stock market you know is that average is a half a percent a day or a quarter percent of a day or five percent a day and faculty make a lot more money if volatility was higher because it could create more mistakes in the market so volatility is a huge plus to the real investor Ben Graham used the example of mr. market which is the we've used it I've copied it in the report I copied from all the good writers then said you know just imagine that when you buy a stock that you in effect you've bought into a business where you have this obliging partner who comes around every day and offers you a price at which you'll either buy or sell and the price is identical and no one ever gets that in a private business where daily you get a buy sell offer buy by a private buyer party but in the in the stock market you get it that's a huge advantage it's the and it's a bigger advantage if this partner of yours is a heavy drinking manic-depressive the the crazier he is the more money you're gonna make so you should as an investor you love volatility not if you're on margin but if you're in if you're an investor you aren't on margin and if you're an investor you you love the idea of wild swings because it means more things you're going to get mispriced actually volatility in recent years is dampened from what it used to be it looks bigger because people think in terms of Dow points and in terms of Dow points and and and and so they see these big numbers about plus 50 or minus 50 or something but volatility was was much higher many years ago than it is now and you had the amplitude of the swings which was really wild and and that that gave you more opportunity Charlie well it got to be the occasion in corporate finance departments of universities where they developed a notion of risk adjusted returns and my best advice all of you would be to totally ignore this development risk had a very good colloquial meaning meaning a substantial chance that something would go horribly wrong and the finance professors sort of got volatility mixed up with a lot of foolish mathematics and to me it's less rational than what we do and I don't think we're gonna change you know finance department seats that the volatility equals risk now they want to they want to measure a risk and they don't know any other way they don't know how to do it basically and so they they say that volatility measured risk and you know they i've also often used the example that the washington post stock when we first bought it had done in 1973 has gone down almost fifty percent from a valuation of the whole company of close to say 180 175 million down to maybe eighty million or ninety million and because it happened very fast the beta of the stock had actually increased and a professor would have told you that the stock the company was more risky if you bought it for 80 million than if you bought it for hundred and seventy million which is something that i've thought about ever since they told me that 25 years ago and I still haven't figured it out and incidentally I should make a make an announcement on that because I think that I've I've made a certain amount of fun of financial departments over the years the a fellow named Mason Hawkins who run southeastern asset management just gave a $1,000,000 gift to the University of Florida and the state of Florida is matching that with 750,000 so this million 750 is going to be used to have several courses in what essentially is the gramm approach to investing I think starting very soon so that there will be at least and there are more than this but there will be a finance department in this case specifically devoted to teaching the the gramm approach and and I think they're even going to pick up on my suggestion that I stuck in the annual report about having a course on how to value a business and and and what your attitude toward the stock market should be so thanks to Mason who's done very well managing money I should have and there will be a at least one University course that the tackles what I think are the important questions in investing you

Channel: The Financial Review

Views: 66,845

Keywords: risk, volatility, Warren Buffet risk, Charlie Munger risk, market risk, investment risk Warren buffet, investment risk, Buffet Munger risk, The Financial Review, Financial Review, business, investing, finance, Berkshire Hathaway, Berkshire 1997, Berkshire risk

Id: hXtHYyd9kMM

Length: 10min 28sec (628 seconds)

Published: Sun Oct 21 2018