So what is risk? Well, risk should be viewed as the likelihood of permanent loss of capital. Betting at a casino is a good example. And it is in this context that the risk-versus-reward profile should be assessed. When you buy shares in a business for $30 apiece because you have determined through data analysis and your reasoning that the shares have an intrinsic value of $60, but then the stock tanks to $20, you have not taken on risk but mere price volatility. Of course, you should naturally go back and determine that the intrinsic value has not materially changed for the worse. If it hasn't, then your investment has really become less risky, and you should view the price volatility as an opportunity to take advantage of a better bargain.
It's this misunderstanding of risk that causes investors undue stress and results in sloppy buying and selling. Buffett used to say that you should be able to watch your investment decline by 50% and not feel pressured to sell. Mohnish Pabrai told me that a stock's price immediately tends to decline whenever he buys a stock and shoot up when he sells, yet the declines don't bother him, since he doesn't concern himself with price volatility.
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