[[Start here]] → [[What works in stocks?|what works]] → [[expose to return drivers|drivers]] → Low Volatility --- ![[low-risk-tortoise-hare.png]] Most investors believe that to achieve higher returns you have to take on more risk. In our minds we hold an image like the one below. As we take on more risk, we expect to receive higher returns. ***But what if this really isn’t the case?*** What if the tortoise really does beat the hare? ![[risk-return-line.png]] It turns out that the above image only holds true when you compare different asset classes - say cash, versus stocks. Cash is low risk and gives low returns. Stocks are certainly more risky (they crash after all) and they do offer higher returns in the long run. But the above picture completely falls apart when you reduce your investigation to *just stocks*. ==Low risk stocks tend to outperform high risk stocks==. The return distribution looks more like this: ![[low-risk-high-risk-invert.png]] Research studies by famous academics and practitioners including Haugen & Baker[^1], Pim van Vliet[^2] and Frazzini & Pederson[^3] have proven the above - that historically ***low volatility (and low beta) shares outperform high volatility shares*** over the long run (on a risk adjusted basis). You can think of this as a “Tortoise and Hare Effect” in stocks. Yes, the parable really is true. The slow moving, boring Tortoise wins out in the long term against the flashy Hare. As Pim Van Vliet shows in his excellent “High Returns from Low Risk” conservative stocks really do beat high risk stocks! ![[vliet-conservatiev-stocks.png]] Why does this weird behaviour occur? Better thinkers than me have identified a few key reasons: 1. Firstly, investment processes at institutions are often biased towards risk-seeking by fund managers. They seek rapid returns to improve their bonuses and fund rankings in the short term. This leads to over-investment in higher risk stocks, and the shunning of low risk stocks. *(Check out [[Haugen & Baker - Low Risk Stocks Outperform|Haugen’s explanation]]).* 2. Secondly, private investors often aim for “Lottery type returns” by punting on speculative shares with quite binary outcomes. We see this all the time in the UK - with story stocks on AIM. 3. Lastly, investors are often averse to borrowing money to invest in low volatility equities. All these factors, and more, ensure that higher risk stocks are often systematically over-owned and over-priced. This reduces their eventual returns (on average) and inverts the risk-return relationship. Over the long term, and in general, a conservative bias in the stock market does bring additional rewards. --- NB - if you do want a deeper explanation of the Low Risk Anomaly and how it impacts UK stocks, check out the ebook I wrote about the [Stockopedia RiskRatings](https://www.stockopedia.com/books/riskratings/). It’s a brief read. [^1]: [[Haugen & Baker - Low Risk Stocks Outperform]] [^2]: [[Van Vliet & de Koning - High Returns from Low Risk]] [^3]: [[Frazzini & Pederson - Betting against Beta]]