Risk has a long list of definitions that make it unnecessarily confusing. Peter Bernstein sees risk as “the consequences of being wrong.” That’s a version I can get behind.
He contributed it to a great discussion with James Montier on how the different definitions of risks fit together, mainly whether volatility fits in and what it means for investing.
Ironically, Bernstein can see volatility as risk from a behavioral standpoint (hardly mathematical) because of the queasy feeling it creates. Montier sees volatility as opportunity.
In a sense, they’re both right. Volatility is the catalyst to a good or bad decision. The decision introduces the potential for risk — learned only in hindsight from the outcome.
Their discussion offers some food for thought: Continue Reading…