======Historical Volatility======
Historical Volatility (also known as 'realized volatility') is a statistical measure that tells you how much an asset's price has bounced around over a specific period in the past. Think of it as a stock's "moodiness score." A stock with high historical volatility is like a dramatic teenager, with its price swinging wildly up and down. A stock with low historical volatility is more like a stoic grandparent, with a price that remains relatively calm and stable. This measure is calculated using the [[standard deviation]] of the stock's price changes over time and is typically expressed as an annualized percentage. For example, a historical volatility of 20% means the stock's price has historically tended to move within a 20% range (up or down) of its average over a year. It’s a purely backward-looking metric; it tells you about the road already traveled, not the road ahead.
===== How Is It Calculated? =====
You don't need to be a math wizard to grasp the concept, but it's helpful to know what's under the hood. Calculating historical volatility (HV) involves a few simple steps:
  - 1. **Gather the Data:** First, you collect a series of historical prices for a stock, usually the daily closing prices, over a chosen period (e.g., the last 30, 90, or 252 trading days).
  - 2. **Calculate Daily Returns:** Next, you figure out the percentage change in price from one day to the next for the entire period. These are the daily "jumps" or "dips."
  - 3. **Find the Standard Deviation:** You then calculate the standard deviation of these daily returns. This number quantifies how spread out the daily price changes are from their average. A bigger number means more spread, hence more volatility.
  - 4. **Annualize It:** Since the calculation is based on daily data, the final step is to scale it up to represent a full year. This is done by multiplying the daily standard deviation by the square root of the number of trading days in a year (usually 252). The formula looks like this: **Annualized HV = Daily Standard Deviation x √252**.
===== Why Does It Matter to a Value Investor? =====
For a [[value investing]] purist, price volatility isn't the same as risk. In fact, it can be your best friend.
==== Volatility as a Source of Opportunity ====
The great investor [[Warren Buffett]] famously noted that "Volatility is far from synonymous with risk." True risk, for a value investor, is the chance of a permanent loss of capital, which happens when you buy a poor business or overpay for a good one. Price swings are just noise.
High volatility often reflects fear or panic in the market. When [[Mr. Market]] has a meltdown and sends a stock's price plummeting, its historical volatility spikes. For the disciplined investor who has analyzed the business and determined its [[intrinsic value]], this panic creates a golden opportunity. The wild price drop can create a significant [[margin of safety]], allowing you to buy a wonderful company at a ridiculously cheap price. In this view, volatility isn't something to be feared; it’s the very thing that serves up bargains on a silver platter.
==== A Poor Substitute for True Risk ====
Relying on historical volatility as your primary measure of risk is like driving while looking only in the rearview mirror. A company with a history of low volatility can suddenly face a catastrophic business challenge (like a new competitor or a product failure), making its stock incredibly risky overnight.
Conversely, a company with high historical volatility might be on the cusp of a turnaround, with its future set to become much more stable. The key is to focus on the underlying business fundamentals—its competitive advantages, management quality, [[debt]] levels, and [[earnings power]]—not just the squiggles on a price chart.
===== Historical vs. Implied Volatility =====
It's crucial not to confuse historical volatility with its forward-looking cousin, [[implied volatility]] (IV).
  * **Historical Volatility (HV):** This is the //actual// volatility the stock exhibited in the //past//. It’s a historical fact, like looking at last month's weather report.
  * **Implied Volatility (IV):** This is the market's //forecast// of what volatility will be in the //future//. It is derived from the prices of stock [[options]]. It’s the market’s best guess at the weather for next month.
Comparing the two can be insightful. If a stock's implied volatility is much higher than its historical volatility, it suggests that the market is expecting a storm ahead. For a value investor, this could be a signal of peak fear and, potentially, a great time to be greedy when others are fearful.
===== Practical Takeaways =====
Here’s how to put historical volatility to work:
  * **Know the Personality:** Use HV to get a quick sense of a stock's character. Is it a calm, steady compounder or a wild, unpredictable beast?
  * **Embrace the Swings:** Don't automatically shun high-volatility stocks. They are often the hunting ground for the best bargains, as fear drives prices well below intrinsic value.
  * **Look Forward, Not Back:** Always remember that HV is a backward-looking metric. Your investment thesis should be based on the company's future, not its past price patterns.
  * **One Tool, Not the Whole Box:** HV is just one piece of the puzzle. Use it alongside rigorous fundamental analysis to make informed decisions.