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Risk and return are not correlated. There are risks and there are returns. See AAA bonds during GFC. Great businesses are great companies at reasonable prices n
by confluence 14y ago
Risk and return are not correlated. There are risks and there are returns. See AAA bonds during GFC. Great businesses are great companies at reasonable prices not overvalued growth stocks.
Most of modern economic and finance theory is based on fundamentally broken models of risk and return.
- polyfractal 14y agoDefine "great company". Known risks and future returns are certainly correlated. Unknown risks (financial crisis meltdown) are obviously uncorrelated because they are unknown. You can't control for those, which is why you diversify. What are you going to do when your "great company" has a horrible CEO scandal and sinks the company? That's an unknown risk that would be prevented by diversifying your investments. Known risks (such as "can this company execute it's vision well enough to be profitable at 500m revenue/year?") are what you weigh against the return ("I personally think so, but the market doesn't, so I'm getting a discount on the stock price when it eventually succeeds").