John Dean: So first off, Professor Plum, when we say volatility, people equate the markets I think with volatility but what are we talking about? What is it? How would you define it?
Rick Plum: Movement in price. I mean volatility is the upward and downward movement of price. Now, most people don’t care about the upward. They like the upward movement of price but that’s still volatility. Downward is where we’re worried about, moving our price down. Moving, you know, to a lower value. And all investments have some form of volatility. What kind of risk? Well, one of the main risks that people focus on are is the movement, and typically they only focus on the downward potential movement. That’s the volatility. Upward, downward, they’re both…we have to measure the movement, the unexpected so to speak movement, although it’s totally expected that the value of a stock, the value of a bond is going to move on a daily basis. The current value of that investment, if I were gonna try to sell it or buy it, is going be higher or lower than it was 5 minutes ago, 10 minutes ago, yesterday, a week ago. That change in value is the volatility.
What we’re trying to do is get in to something when it is X price and get out of it when it is X plus. We try to avoid getting into it when it’s X and selling it when it’s X minus. So it’s…but unfortunately, we can’t predict what’s going to happen.
There were times where, I mean, if you look at companies and you say wait a minute, “This company has increased revenue, increased market share, increased productivity, everything it’s doing is doing really, really well.” And you look at the price of the stock and it’s going down. Well, why? Well it’s just the things that happen in the market. We’ve also seen companies, you know, especially, well, back in the ’90s there were companies had no chance of ever surviving, no chance of making a profit. Their cash burn rate was gonna put ’em outta business in 15 months and at their best projections they would see a product revenue 3 years from now. And people were beating the living heck out of it.
John Dean: Were they, though?
Rick Plum: Forget P.E. “E” is earnings.
John Dean: They didn’t have any.
Rick Plum: They don’t have any earnings. They never expect to have earnings, but people were buying it because they looked…because it was on an upward trajectory. Right up until it wasn’t. And that volatility is what we’re trying to use to make money, but it goes the other way too. And it goes the other in times when you can not predict.
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