Risk Versus Volatility

Fundamental success in the stock market is a deep understanding of risk and its impact on portfolio returns. At MARP Invest, we view risk differently—primarily because our focus is on long-term value creation. While the concept of risk is easy to grasp, it is difficult to quantify. As a result, much of the finance industry has adopted models that equate risk with volatility, largely because volatility is measurable. This approach makes sense for short-term trading horizons; however, volatility moves in both directions—positive and negative—and should not be a major concern for long-term investors.

All long-oriented equity portfolios are exposed to broader market risks, known as systematic risk. Examples include interest rates, inflation, and unpredictable “black swan” events such as pandemics. For the purpose of this discussion, we focus on unsystematic risk—risk unique to a specific business or industry. These risks can include excessive leverage, poor management decisions, supply chain disruptions, product failures, legal challenges, or shifts in competitive dynamics. From an investor’s perspective, additional risks arise from overpaying for assets or buying on margin. Conventional wisdom suggests some of these risks can be diversified away. While we agree in principle, we align with the late Charlie Munger, who famously referred to excessive diversification as “di-WORSE-ification.” We believe that a disciplined and rigorous approach to risk analysis can achieve the same outcome more effectively.

At MARP Invest, this philosophy is built into our investment process, resulting in portfolios that exhibit the following risk-averse qualities:

• Durable, competitively advantaged business models

• Low debt service ratios or net cash balance sheets

• Management teams financially aligned with shareholders

In conclusion, while risk may be difficult to quantify, it can be identified—and thoughtful identification often reveals opportunity. Especially in cases where low-risk, high-volatility businesses are misunderstood, disciplined analysis and a long-term mindset can create exceptional outcomes.