Skip to main content

Sound Advice: April 3, 2024

You can beat the market with high beta stocks, if . . .

. . . the market always goes up.  The problem is that stocks tend to go up two thirds of the time and down one third of the time.

What’s beta?  Beta is a measure of a stock’s volatility over time relative to that of the overall market.  By definition, the market (i.e., the Standard & Poor’s 500 Index) has a beta of 1.00.  A stock with a high beta (i.e., over 1.00) will generally have greater movement up and down than the market itself.  So if the market climbs 10%, a stock with a beta of 1.50 will climb 15%.  And vice-versa. Conversely, a stock with a low beta such as .80 will have smaller movements in both directions.

Stocks such as Nvidia, Advanced Micro Devices, and Etsy, are prime examples, typically with betas above 1.75.  These are high growth companies whose market performance typically is reflected in unusual investor enthusiasm and hefty valuations while their expansion continues.

Of course, the equation has a flip side, which is what happens when there’s disappointing news or the eventual moderation of forward progress.  And that, unfortunately, is when the benefit of high beta will do an about-face.

Yet, there have been a number of multiyear spans when the market has had extended linear upswings.  Those were the times when fund managers have tended to trumpet their ostensibly special skills.  Not surprisingly, though, those who had been the leaders invariably found themselves at the back of the pack when the indexes started slipping.

It might be comforting to think that there are professionals with extraordinary skills that enable them to maintain their investment positions during market advances while moving to cash when times are tough. But that’s a hypothetical talent called market timing, a talent that is elusive in the extreme.

One wonders why anybody even bothers.  The simple decision of holding nothing more than ultra low cost market index funds will almost always (if not always) give you results that are better than those of Wall Streeters who pretend to be all-knowing investment professionals.

The other key decision is asset allocation, which is largely determined by considering an investor’s time horizon, experience, risk tolerance and need for current income.  With those properly understood, creation of a worthwhile portfolio should be straightforward.

N. Russell Wayne

Weston, CT

Any questions: please contact me at nrwayne@soundasset.com

203-895-8877

www.soundasset.blogspot.com

Comments

Post a Comment

Popular posts from this blog

Sound Advice: February 21, 2024

800-000-0000 That’s 800-000-0000 Again, 800-000-0000 That’s the typical closing for the hard sell commercials that are increasingly polluting media airwaves.   These are the commercials for products or services you rarely need or most definitely should avoid. A substantial number are on behalf of groups of attorneys who would have you believe that you and many others may be entitled to cash compensation for having used or being exposed to some evil item or substance some time in the last few decades.   The pitch always includes a comment that there’s no cost to you unless there is a settlement in your favor. Much of this is rubbish, but when the appeal suggests that there’s nothing to lose, why not take a shot.   And, as you would expect, “advisors” are standing by 24/7 to take your call and help get the process in motion.   What kind of advisor would be available at 3 a.m.? One version of this approach pops up every year between October 15 th and Decemb...
Post a Comment
Read more

Sound Advice: September 21, 2022

The Professional Approach To Stock Selection There are various approaches to stock selection, but the two that predominate are fundamental analysis and technical analysis.  Fundamental analysis is a numbers-based method that evaluates key factors such as income and financial health, including the past, present, and future.  Technical analysis emphasizes movements and formations of stock prices. Fundamental analysis is based on factors that over time have proved to have a meaningful impact on stock price movements.  The optimal picture of corporate profitability is steady growth, both in the past and, prospectively, in the coming years.  Steady growth is rewarded by higher valuations of underlying earning power than those accorded companies with erratic progress. When professionals screen (filter) the data of the broad universe of stocks, they look for companies that move ahead every year, regardless of the prevailing economic conditions.  Although high pas...
Post a Comment
Read more

Sound Advice: July 26, 2023

Is Day Trading a Good Idea? Day trading can be both exciting and potentially profitable, but it also comes with significant risks and challenges. Whether it's a good idea depends on several factors, including your financial situation, risk tolerance, time commitment, and knowledge of the markets. Here are some considerations to keep in mind: Risk and volatility: Day trading involves buying and selling securities within a short time frame, often within the same day. This exposes you to the inherent volatility and risks of the market. Prices can fluctuate rapidly, and unexpected events can have a significant impact on stock prices, making it challenging to consistently make profits. Time commitment: Day trading requires a substantial time commitment. It involves closely monitoring market movements, conducting research, and executing trades. It can be stressful and demanding, as you need to be actively engaged in the market during t...
Post a Comment
Read more