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Part 1: The Techniques > Fundamental Volatility

Chapter 5. Fundamental Volatility

The connection between volatility and risk is unavoidable. We generally associate the two but make the connection via market price trends. So, even fundamental investors tend to view volatility in terms of price, which is a technical indicator.

Is price a valid test of risk? If you intend to identify long-term investments by analyzing fundamental indicators, how do you define risk, other than in terms of price volatility? In this chapter we explore the question of fundamental volatility—trends in sales and earnings—as an alternate method for defining investment risk. Just as a corporate forecaster wants to be able to identify predictable patterns of growth in sales and profits, investors also desire predictability. In terms of fundamental trends, a “predictable” outcome is one with low volatility in operating results. Risk itself can be defined by how predictable the year-to-year sales and earnings are reported.


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