From the 2014 Berkshire Hathaway Shareholder Letter
Stock prices will always be far more volatile than cash-equivalent holdings. Over the long term, however, currency-denominated instruments are riskier investments—far riskier investments—than widely-diversified stock portfolios that are bought over time and that are owned in a manner invoking only token fees and commissions.
That lesson has not customarily been taught in business schools, where volatility is almost universally used as a proxy for risk. Though this pedagogic assumption makes for easy teaching, it is dead wrong: Volatility is far from synonymous with risk.
The theoretical proposition that stocks are "riskier" than bonds or cash has been built on the measurement of beta. This mathematical calculation of short-term price fluctuations has absolutely nothing to do with risk.
For the great majority of investors, who can and should hold stocks for decades, their focus should be on whether the purchasing power of their holdings will be materially greater at the end of their holding period. That is the true test.
Measuring "risk" by beta is like measuring someone's intelligence by their shoe size. Both give you a number, but neither captures what it purports to measure.
The real risk for an investor is that they:
None of these risks are captured by beta.
If a wonderful business drops 50% in price, it has become less risky—not more. The academic who computed beta would say the stock became riskier. This is backwards.
A simple example: You find a $1 bill on the ground. When it costs you 60 cents, is it riskier than when it costs you 40 cents? Of course not. Yet beta says it is.
The investor who has been scared into thinking volatility equals risk will never buy that dollar bill at 40 cents. They will wait for "safety"—which is to say, they will wait until it costs 90 cents and feels comfortable. The irony is thick.