Again, a directional change in share price resulted in higher volatility. There is a fear that the economy will slow and Infosys will have lower business growth. Since January 2022, the US central bank (the Fed) and other major central banks are focused on fighting inflation and are increasing interest rates from decade-low levels. In February - March 2020, we were hit by the China virus, Covid, and we were all in an uncertain era and share prices declined so this directional change caused higher volatility īy April 2020, we saw a surge in online activity and there was expectation that companies like Infosys will benefit, and the share price changed direction and surged - so volatility increased In October 2019, there was a whistleblower case that triggered the share price decline, and volatility increased The risk of the businesses to Infosys were and are: At no point does volatility measure the 'risk' of the business of Infosys. Or, when there is a directional change - say in April 2020 - volatility again surged. When there is a directional change - say in October 2019 when the share price declined - then volatility surges. The consistency of the direction reduces volatility intuitively, if something that is rising, keeps on rising - it is being consistent and, by definition, has lower volatility. Note how, when the share price has a clear direction - upwards or downwards - volatility actually declines. The 90-day volatility numbers are, as one would expect, all over the place because this really measures the changes in the price of Infosys. The 90-day moving average, which removes the sharp daily price movements and plots a longer-term line showing the avg price on a rolling 90-day basis, shows a gently sloping upward curve - then a decline during Covid (the daily share price fell sharply) - and then a quickening pace of gains as share prices surged after the first lockdown in June 2020.īy January 2022 there is fatigue in the daily share price and by March 2022, the 90-day moving average starts a decline. The share price of Infosys has surged approximately 3x over the past 5 years. Graph 1: Infosys: should you make a buy/sell judgement based on 'volatility'? (Source: Bloomberg)
Let me give you a few examples by comparing the data for Infosys, Reliance, and the Quantum Gold Fund. It may, however, give you an indication about the bumpiness of the ride if you remain invested in that share or mutual fund. And that is a dangerous and inaccurate substitution of risk.Ī measure of the behaviour of change in the price of a share or the NAV of a mutual fund, tells you very little about the possible underlying risk inherent in that share or mutual fund. What the field of finance has done is convert risk into 'volatility' - the up and down movement of a share price of a stock or commodity or the NAV of a mutual fund. In their desire to find an answer to everything and place everything neatly in a box, packaged into a grid, and made simple academia swopped down on 'volatility' as a measurement of risk. But with an MBA or a CFA to back them up, academia has brainwashed millions of financial folks to believe they can measure risk and report risk. They don't - mostly because risk cannot be calculated or measured.
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It is something qualitative - not quantitative.įor decades, the field of finance has misled investors by claiming that they know how to measure risk. The Honest Truth is that Risk, like beauty, cannot be articulated into a mathematical grid or equation and tucked away into a corner box. For example, 'Unknown to you fund managers of mutual funds are making risky bets with your investments'. When used as a verb (a verb is a word that describes an action) risk means to expose (someone or something valued) to danger, harm or loss. For example, 'There is a risk in investing in stock markets.' Risk is a four-letter word - and so is 'Luck'.īut before I draw a connection between Risk, Luck, and Plan - a reminder of the definition of 'risk'.Īccording to the Oxford Dictionary, when used as a noun (a noun is a word that refers to something) risk is a situation involving exposure to danger.
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