Volatility vs. Risk

Special Report

Volatility Versus Risk

December 16, 2023

Berkshire Hathaway Share Price Fluctuations, 1964 to 2022

(From the December 15th Weekly Summary, slightly edited)

“Investing is the greatest game in the world. It’s like baseball except that you never have to swing.  All day you wait for the pitch you like; then when the fielders are asleep, you step up and hit it.”

Warren Buffett, whose Berkshire Hathaway has created enormous wealth for its shareholders: from 1964 to 2022 inclusive the shares have gained 3,787,464% (not a typo), which is a CAGR of 19.8% per year. In contrast, the S&P 500 has gained only 24,708% for a CAGR of 9.9% year.

(Cynergy Research comment: in contrast to both prior indicators, the Cynergy Research Global Growth Model Portfolio is at a 97% gain and 12.1% CAGR over 6 years, so there’s a ways to go to catch Mr. Buffett. But we are working on it!) 

Mr. Buffett has also done well, with a net worth of about US$120B as of December 2023, making him the 7th richest person in the world.  But it hasn’t been all roses for him at Berkshire Hathaway: since 1965 there’s been 5 instances of the share price declining by over 12.5%, with the worst drop being 48.7% in 1974. Think about that: an almost 50% drop in one year for a modest conglomerate. There were also 6 minor negative years, and 8 minor positive years.  Moral of the story: nothing ever goes up in a straight line unless it’s a perfect rocket launch, and even those curve a bit at a certain height.

The bottom line is that there will always be Market and Stock Volatility.  This does not represent Risk as long as you can afford to ride through the inevitable bad times in order to emerge at the other end unscathed and ready for a major bounce-back.  Risk is defined as the permanent impairment or permanent loss of Capital.  If you don't sell during a downturn, you don't suffer a loss and thus are not at Risk.  But you did experience Volatility...

The way we handle Market and Stock Volatility at at Cynergy Research is to incorporate Global Diversification into our overall Strategy, and in that manner even if a couple of companies get hammered by problems specific to them, then the overall impact is only perhaps 2-3% of the overall Portfolio value.  Secondly, by having 50 companies in the Model Portfolio we smooth out Market-wide downturns, in that there's always a few winners in every economic scenario, and these tend to balance out the ones that are negatively affected.

They also don’t teach that in any level of schooling.