Benjamin Graham and Risk

“Beta is a more or less useful measure of past price fluctuations of common stocks. What bothers me is that authorities now equate the beta idea with the concept of risk. Price variability yes; risk no. Real investment risk is measured not by the percent that a stock may decline in price in relation to the general market in a given period, but by the danger of a loss of quality and earnings power through economic changes or deterioration in management.” —Benjamin Graham

Benjamin Graham and Risk by Bruce Grantier

In this article Bruce Grantier reviews the modern portfolio theory (“MPT”) concept of risk and that of Benjamin Graham and other value investors. Grantier includes a discussion of human behavioural biases and conclude with some comments on the differences in the two definitions of risk.

See here for full PDF of the article Benjamin Graham and Risk.

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Disclosure: I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company or individual mentioned in this article. I have no positions in any stocks mentioned.

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One thought on “Benjamin Graham and Risk

  1. In “The Superinvestors of Graham-and-Doddsville”, Warren Buffett himself says:
    “Our Graham & Dodd investors, needless to say, do not discuss beta, the capital asset pricing model, or covariance in returns among securities. These are not subjects of any interest to them. In fact, most of them would have difficulty defining those terms. The investors simply focus on two variables: price and value.”

    and then later:
    “Now, if the stock had declined even further to a price that made the valuation $40 million instead of $80 million, its beta would have been greater. And to people who think beta measures risk, the cheaper price would have made it look riskier. This is truly Alice in Wonderland. I have never been able to figure out why it’s riskier to buy $400 million worth of properties for $40 million than $80 million.”

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