We define risk, using dictionary terms, as “the possibility of loss or injury.” Academics, however, like to define “risk” differently, averring that it is the relative volatility of a stock or a portfolio of stocks—that is, the volatility as compared to that of a large universe of stocks. Employing databases and statistical skills, these academics compute with precision the “beta” of a stock—its relative volatility in the past—and then build arcane investment and capital allocation theories around this calculation. In their hunger for a single statistic to measure risk, however, they forget a fundamental principle: it is better to be approximately right than precisely wrong.
6. Diversification. Buffett disagreed with conventional wisdom that investors should hold a broad portfolio of stocks in order to shed company-specific risk. In his view, investors typically purchased far too many stocks rather than waiting for one exceptional company. Buffett said,
Figure businesses out that you understand and concentrate. Diversification is protection against ignorance, but if you don’t feel ignorant, the need for it goes down drastically.