Volatility isn't risk

The most absurd idea that I find in the investment community is this notion that volatility is a measure of risk. The only reason I can think of why volatility is used as a measurement to risks is because it is easy to calculate and it seems reasonable.

Volatility just measures how a stock trade, not the measure of risk. The only time volatility can be used as a measure of risk is if you need cash in a short period of time. Other than that, it is completely irrelevant how a stock trades.

The problem with thinking volatility is risks is that use base your decisions on how a stock trades rather than the underlying fundamentals. If a stock goes down in price, they assume that the market is providing them information, when it really is just have one of its mood swings.

Volatility can also provide a false sense of security. If the markets are fairly stable for a while, people can tend to think of them as less risky. Look what happened in the mortgage and housing market where investors were complacent for years. It wasnt' until economic conditions changed that the real risks were exposed by the markets.

Real risks has to do with factors that can go wrong with the underlying fundamentals of your investment. There isn't a magic number that represents it, but a collection of variables including many unquantifiable factors ranging from politics to consumer taste. It is messy and doesn't fit into any simple models, but that is the way the real world works.