Volatility is a curse

It is surprising why fundamental analysis are using standard deviation or dispersion related statistical term to measure the risk of a stock. In common sense, it does not bring any true meaning at all to individual investors. For institutional investors, it is some how argued that, measuring risk using standard deviation means that institutional investors want to have a smooth return on the entire portfolio. This sound a bit logical as institutional investors often like to stabilize the return with passive portfolio management technique and spent more of their time to market their investment product and convince the public why they should continuously earn a 1.5% management fees.

In fact, as an individual investor, risk should never be measure with standard deviation. Instead, risk could be more objectively measured with potential loss from enter to cut loss point.

While maintaining a balance point of view and trying my best to rationalize why the many investment community still keep learning traditional finance theory to measure risk using the dispersion concept, I found a reasons:

Whenever the market is topping and people are acting irrational, the price volatility is often great and thus produces a high risk scale from the measurement of standard deviation. (OMG, seems like not true also, people are using standard deviation from the entire historical data, not using a standard deviation with embedded moving average formulae)

Sadly, even the most convincing reason couldn’t convince me why we should use a standard deviation to measure risk. The concept of total portfolio to me is just a truly ignorance on which stock to pick in the investment process.

It is indeed a stupid question to consider about, to consider the strategy from those dreamers who never play stock before.

Nonetheless, I wish to end this with some useful idea. Volatility is indeed a curse. Surprisingly, none of the famous technical analysis books seem to touch on this topic. The argument is simple. High volatility tends to stop some investors out of the game. And sudden spike without support from inspiring fundamental changes in the company itself should be viewed as a golden opportunity to take profit. After all, ask yourself this question: “Are you willing to buy a stock when the price shoots up suddenly but it doesn’t has any changes in the fundamental value?” Unless mindless and blind TA hardcore (which jump into every breakout), nobody will go in. People will tend to wait for the price to drop back to the near the original level because they have strong anchor to the old pricing level. If so, who else will buy the stock with sudden spike? Who are going to push the price higher?

Moral of the story: Highly spike is god given, don’t be greedy and nail down the profit.