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Strategies & Market Trends : Gorilla and King Portfolio Candidates -- Ignore unavailable to you. Want to Upgrade?

To: rushnomore who wrote (40372)	3/14/2001 12:20:28 AM
From: Mike Buckley	Read Replies (1) \| Respond to of 54805

rushnomore, You asked that I explain the distinction between risk and volatility. Treatises and dissertations could be written on the subject, so please understand if my response is overly simplistic. In the long run, risk in owning a stock is all about two factors: the sustainable competitive advantage of the underlying company and the valuation of the stock. The risk over the long term is that the stock won't increase sufficiently due to one or both issues. Contrast that with volatility, which is the up and down gyration of the price of the stock. Volatility inherently tends to address the relatively short term, though not necessarily. The more volatile a stock is, the more the emphasis tends to be on the short term. Sometimes volatility has to do with perceptions about the company's sustainable competitive advantage. Sometimes it has to do with the perception about the valuation. Sometimes it has to do with both and other times it has to do with neither (at least insofar as valuation as a reflection of the competitive advantage is concerned.) In summary, all stocks regardless of the level of risk can be volatile. But a volatile stock isn't necessarily a high risk. As an example, a company with a highly sustainable competitive advantage and a reasonable valuation poses a relatively low risk even though the stock can be highly volatile. --Mike Buckley