In our opinion, the real risk an investor must assess is whether
his aggregate after-tax receipts from an investment (including
those he receives on sale) will, over his prospective holding period,
give him at least as much purchasing power as he had to begin
with, plus a modest rate of interest on that initial stake. Though
this risk cannot be calculated with engineering precision, it can in
some cases be judged with a degree of accuracy that is useful. The
primary factors bearing upon this evaluation are:

1) The certainty with which the long-term economic charac-
teristics of the business can be evaluated;

2) The certainty with which management can be evaluated,
both as to its ability to realize the full potential of the busi-
ness and to wisely employ its cash flows;

3) The certainty with which management can be counted on
to channel the reward from the business to the sharehold-
ers rather than to itself;

4) The purchase price of the business;

5) The levels of taxation and inflation that will be experienced
and that will determine the degree by which an investor’s
purchasing-power return is reduced from his gross return.

Academics, however, like to define investment “risk” differ-
ently, averring that it is the relative volatility of a stock or portfolio
of stocks—that is, their volatility as compared to that of a large
universe of stocks. Employing data bases and statistical skills,
these academics compute with precision the “beta” of a stock—its
relative volatility in the past—and then build arcane investment
and capital-allocation theories around this calculation. In their
hunger for a single statistic to measure risk, however, they forget a
fundamental principle: It is better to be approximately right than
precisely wrong.

In fact, the true investor welcomes volatility. Ben Graham ex-
plained why in Chapter 8 of The Intelligent Investor. There he in-
troduced “Mr. Market,” an obliging fellow who shows up every day
to either buy from you or sell to you, whichever you wish. The
more manic-depressive this chap is, the greater the opportunities
available to the investor. That's true because a wildly fluctuating
market means that irrationally low prices will periodically be at-
tached to solid businesses. It is impossible to see how the availabil-
ity of such prices can be thought of as increasing the hazards for an
investor who is totally free to either ignore the market or exploit its
folly.