(FORTUNE Magazine) – Investors are always advised to minimize risk. Wall Street defines risk as volatility, and the way to reduce it, the experts say, is to diversify broadly. But in the new 1993 Berkshire Hathaway annual report, Chairman Warren Buffett says that smart investors may do better to ignore Wall Street's advice. Berkshire Hathaway has major stakes in only nine stocks, a concentration reflecting Buffett's belief that he is capable of making only a relatively few smart decisions in his lifetime. A brief excerpt from his letter to shareholders: "The strategy we've adopted precludes our following standard diversification dogma. Many pundits would therefore say the strategy must be riskier than that employed by more conventional investors. We disagree. We believe that a policy of portfolio concentration may well decrease risk if it raises, as it should, both the intensity with which an investor thinks about a business and the comfort level he must feel with its economic characteristics before buying into it. In stating this opinion, we define risk, using dictionary terms, as 'the possibility of loss or injury.' "Academics, however, like to define investment 'risk' differently, averring that it is the relative volatility of a stock or a portfolio of stocks -- that is, their volatility as compared to that of a large universe of stocks. Employing databases and statistical skills, these academics compute with precision the 'beta' of a stock -- its relative volatility in the past -- and then build arcane investment and capital allocation theories around this calculation. In their hunger for a single statistic to measure risk, however, they forget a fundamental principle: It is better to be approximately right than precisely wrong. "For owners of a business -- and that's the way we think of shareholders -- the academic's definition of risk is far off the mark, so much so that it produces absurdities. For example, under beta-based theory, a stock that has dropped very sharply compared to the market -- as had Washington Post when we bought it in 1973 -- becomes 'riskier' at the lower price than it was at the higher price. Would that description have then made any sense to someone who was offered the entire company at a vastly reduced price? "In fact, the true investor welcomes volatility . . . because a wildly fluctuating market means that irrationally low prices will periodically be attached to solid businesses. It is impossible to see how the availability of such prices can be thought of as increasing the hazards for an investor who is totally free to either ignore the market or exploit its folly."