The logic of randomness in the stock market

By: Sanjoy Bhattacharyya/Forbes India

No matter how attractive a stock, avoid it if you are unwilling to bear the cost of being wrong.

The overwhelming majority of investors are convinced risk is related to volatility. Warren Buffett and Benjamin Graham have emphasised the importance of viewing risk as the permanent loss of capital. The truth lies somewhere in between. The meaning of risk is greatly influenced by your time horizon. For a day trader, a sharp decline in the price of a stock leads to permanent loss of capital simply because time is not on his side. For the investor with a five-year time horizon, the same decline may well be a spectacular opportunity. However, if the long-term investor suffers serious capital erosion, time will fail to heal the problem.

Once the logic of permanent capital loss is understood, one may well be excused for thinking volatility really does not matter. Volatility matters simply because it plays games with our mind and makes us do the wrong things