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 don’t you just spin it and pull the trigger once? If you survive, I will give you $1m." I would decline – perhaps stating that $1m is not enough. Then he might offer me $5m 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 60c, it’s riskier than if you buy a dollar bill for 40c, 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 Washington Post Company in 1973 was selling f...
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