Volatility is not risk. Risk is the reasoned probability of that investment causing it's owner a loss of purchasing power over his contemplated holding period.

Investing is often described as the process of laying out money now in the expectation of receiving more money in the future.

At Berkshire we take a more demanding approach, defining investing as

•  the transfer to others of purchasing power now with the reasoned expectation of receiving more purchasing power – after taxes have been paid on nominal gains – in the future. 
• More succinctly, investing is forgoing consumption now in order to have the ability to consume more at a later date.

From our definition there flows an important corollary: The riskiness of an investment is not measured by beta (a Wall Street term encompassing volatility and often used in measuring risk) but rather by the probability – the reasoned probability – of that investment causing its owner a loss of purchasing-power over his contemplated holding period. 

• Assets can fluctuate greatly in price and not be risky as long as they are reasonably certain to deliver increased purchasing power over their holding period. 
• And as we will see, a non-fluctuating asset can be laden with risk.

Investment possibilities are both many and varied.



http://www.berkshirehathaway.com/letters/2011ltr.pdf

Investors should expect prices to fluctuate

The Relevance of Temporary Price Fluctuations

In addition to the probability of permanent loss attached to investment, there is also the possibility of interim price fluctuations that are unrelated to underlying value.

Many investors consider price fluctuations to be a significant risk:  if the price goes down, the investment is seen as risky regardless of the fundamentals.

But are temporary price fluctuations really a risk?

• Not in the way that permanent value impairments are and 
• then only for certain investors in specific situations.

It is, of course, not always easy for investors to distinguish temporary price volatility, related to the short-term forces of supply and demand, from price movements related to business fundamentals.  The reality may only become apparent after the fact.

While investors should obviously try to avoid overpaying for investments or buying into businesses that subsequently decline in value due to deteriorating results, it is not possible to avoid random short-term market volatility.  

Indeed, investors should expect prices to fluctuate and should not invest in securities if they cannot tolerate some volatility.