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When Smart Investors Do Stupid Things

The article closes by asking, “how long can they produce those kinds of returns before suffering some spectacular crash?”

We now know the answer: about a year.

LTCM was a glaring reminder that past volatility is a terrible measure of future risk. Yet we still obsess over volatility, convinced that it tells us how safe an investment is.

Nassim Taleb describes using volatility as a measure of risk as the “turkey problem.” He writes in his book Antifragile:

A turkey is fed for a thousand days by a butcher; every day confirms to its staff of analysts that butchers love turkeys “with increased statistical confidence.” The butcher will keep feeding the turkey until a few days before Thanksgiving. Then comes that day when it is really not a very good idea to be a turkey.

So if volatility isn’t a good measure of risk, what is?

via When Smart Investors Do Stupid Things.

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