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Author: mungofitch Big gold star, 5000 posts Top Favorite Fools Top Recommended Fools Feste Award Winner! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 250381  
Subject: Re: Imitation is the Sincerest Form of Flattery Date: 11/17/2007 9:43 AM
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You know, it saddens me to see people writing something like this:
After employing sophisticated adjustments for risk, we find that Berkshire's high returns can not be explained by high risk.

First, this sentence is assuming that volatility is risk, always a very
silly proposition, but let's just ignore it and replace the word "risk"
with the word "volatility" in the statement.

The bigger issue is the fundamental idea of CAPM that you can't get
excess returns without taking on excess volatility, which is so
thoroughly disproved as an idea that I'm embarassed for them.
Quite aside from any theoretical argument (there are lots of elegant
disproofs of CAPM), it's just plain demonstrably false empirically:
higher volatility stocks do not have higher average returns, so the
whole concept, though cute in a 1960's ivory tower sort of way, is just
plain annoying now. In fact, higher volatility stocks have lower
average returns, so the whole darned thing is backwards when looking
at the equity asset class, and always was.

Risk is probably more meaningfully measured as the probability-weighted
meaningful loss of capital. i.e., losing your money. The best way to
avoid that is to buy things selling for less than their intrinsic value.

End of rant, sorry.

Jim
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