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Beta Michel Pireu     | Business Day Tuesday, October 9, 2018
From The Superinvestors of Graham-and-Doddsville by Warren E Buffett, published in the Fall, 1984 issue of Hermes, Columbia Business School magazine.

I would like to say one important thing about risk and reward. Sometimes risk and reward are correlated in a positive fashion. If someone were to say to me, I have here a six-shooter and I have slipped one cartridge into it. Why dont you just spin it and pull the trigger once? If you survive, I will give you $1 million. I would decline perhaps stating that $1 million is not enough. Then he might offer me $5 million to pull the trigger twice now that would be a positive correlation between risk and reward!

The exact opposite is true with value investing. If you buy a dollar bill for 60 cents, its riskier than if you buy a dollar bill for 40 cents, but the expectation of reward is greater in the latter case. The greater the potential for reward in the value portfolio, the less risk there is.

One quick example: The Washing Post Company in 1973 was selling for $80 million in the market. At the time, that day, you could have sold the assets to any one of ten buyers for not less than $400 million, probably appreciably more. The company owned the Post, Newsweek, plus several television stations in major markets. Those same properties are worth $2 billion now

Now, if the stock had declined even further to a price that made the valuation $40 million instead of $80 million, its beta would have been greater. And to people who think beta measures risk, the cheaper price would have made it look riskier. This is truly Alice in Wonderland. I have never been able to figure out why its riskier to buy $400 million worth of properties for $40 million than $80 million.
 
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