One reason people avoid the stock market is risk.

You will hear things like “You can lose money so fast, I feel much safer with a term deposit.”

Or, “what if the market “crashes?”

This mindset equates volatility to risk, which is incorrect.

Prices going up and down quickly does not amount to risk.

Some examples of things that amount to real risk are:

• High amounts of debt
• Bad CEO
• Dying industry
• Government regulation
• Litigation

Notice how none of these relate to stock prices?

However, in traditional finance, many people don’t measure risk via real-life considerations such as these.

They measure risk using something called “beta” which measures how volatile a stock price has been in the past.

For example, if a stock price went from $100, up to $200, down to $50, then back up to $100, they would consider this a “high beta” stock and therefore very risky.

This would cause them to avoid this stock because it would increase the “beta” of their portfolio too much.

How idiotic!

Imagine if we applied this to real life. Say you want to buy an apartment.

There are two identical apartment towers right beside each other. Both are brand new. The government valuation for one apartment is $480k.

You inquire about the prices and find out that:

• In Tower A, the price is $500k for an apartment, and the price never changes.

• In Tower B, the agent is a bit looney, so some weeks the price is $500k, sometimes he drops it to $400k, sometimes $300k, sometimes he even puts it up to $700k.

One week, you see he’s selling an apartment for $250k.

You think, what a great deal! You’re getting a house for 50% off! It’s almost too good to be true!

However, your friend says to you – “Oh no, that’s too risky, I bought my apartment in Tower A because it’s safer. The price is stable. You should buy one in Tower A as well.”

You explain to your friend – “I’m buying an identical apartment to yours for $250k, you paid $500k. It’s a good thing the price has moved! I’m getting the exact same apartment as yours but for 50% off!

But your friend can’t look past the volatility.

He doesn’t understand it’s an opportunity to have a chance to buy $1 for 50 cents.

This is how most people view the stock market, and why most people don’t make money. When the price falls, they get scared and sell everything, instead of recognising it as an opportunity to buy even more!

This is odd, because it’s perfectly logical and any rational person should understand it.

If you go to the grocery store and toilet paper is on sale for 80% off, would you stock up as much as you can, or would you think “oh gosh, better not buy toilet paper right now it’s so risky. Let’s wait for the price to go back up?”

Let’s look at a stock example. Below is the chart for Nike over the past 12 months:

What do you notice?

Since Nike is reasonably volatile, the price has moved in a large range. It’s traded as low as $69, and high as $123.

That’s almost a swing of more than 100%!

To look at this another way, the value of the company has swung between $185 billion and $109 billion in the last year.

Now ask yourself – has there been any reason for Nike as a business to suddenly halve in value?

Let’s look at how much the company actually earns as a business.

Here are the sales and earnings figures for Nike over 10 years:

Does their business look volatile to you?

It’s actually the opposite – they’ve been incredibly stable and consistently increasing sales and profits, other than a small dip during Covid.

So let’s go back to that stock chart.

Let’s assume you’ve been through my course Simple Stocks and you’ve learned how to value a company.

You’ve done your homework on Nike, you know the company well (maybe you even work there), and you’ve calculated the company is worth around $100 per share (the blue line).

What does this mean for you?

It means over the past year, you’ve had multiple opportunities to buy Nike for much less than it’s worth (below the blue line).

In September 2023, you had the chance to buy it for $89 (an 11% discount).

If you missed that, you had the opportunity again for several months starting April 2024.

And in August 2024, you had the chance to buy it for $69 (a 31% discount).

You also had the chance to sell it for much more than it was worth. Almost the entire six month stretch between October 2023 and March 2024, you could have sold it at a premium (over $100).

The underlying lesson here is, volatility does not equate to risk.

It’s the complete opposite.

Volatility allows you to significantly decrease your risk, because it offers you a margin of safety.

What’s more risky:

• Buying something worth $100, for $100, or
• Buying something worth $100, for $60?

Obviously the second option! Because the value can fall by 40%, and you still won’t have lost money.

Don’t shy away from volatility.

When hunting for stocks, I actively seek volatility, looking for the stocks that have fallen the most over the past 6-12 months.

It was exactly how we picked up our investments on Myer, Meta and Arvida, which all ended up returning close to 100%.

Once you learn to weather volatility, and use it to your advantage, you’ll be in a position to vastly increase your returns in the stock market, with significantly less risk.