Volatility isn’t a risk

Since writing big insurance policies is a big part of Berkshire Hathaway’s business, there’s no wonder that risk has taken a big portion of Buffett’s and Munger’s attention. Compared to academic finance theories, their ideas are completely different.

Financial academics tend to use volatility as a proxy for risk (mostly because it’s much easier to measure it), but that might have the effect of concluding that an asset can become riskier if it drops in price, which is exactly the opposite of how any rational buyer would think about a lower price. According to Buffett, the risk is basically the chance you suffer a permanent loss of capital.