What it is
The standard measure is beta - a stock's correlation with the S&P 500. Beta of 1.0 means the stock moves in lockstep with the index. Beta of 1.5 means it amplifies index moves 50%. Beta of 0.5 means it dampens them.Why Buffett dismisses it
Buffett: "Beta-based risk measures…are widely accepted, but they are nonsense. The true investment risk is not the volatility of a stock, but the probability of permanent capital loss."The critique: a stock that drops 50% on no news of business deterioration is less risky to a value investor (cheaper) than a stock that's been calmly rising at 5%/year while the underlying business is rotting. Volatility metrics flag the first as risky and the second as safe - exactly backward from a Buffett perspective.
When volatility actually matters
- Leveraged positions (margin, options) - volatility can force you to sell at the worst time
- Short time horizons - if you need the money in 12 months, drawdown risk is real risk
- Behavioural risk - high-volatility stocks tempt investors to sell at the bottom and buy at the top