An important lesson about beta
Today's Financial News - Posted May 13, 2009
Some of my not-so-favorite stocks are in the dumpster today. No big surprise, but it does lend an opportunity to learn about a very important statistic every trader must understand.
By Andrew Snyder, TodaysFinancialNews.com
Baltimore – (TFN): The polls may say more Americans are optimistic, but their wallets show another story. When this morning’s retail figures hit the Street well below expectations, it proves things may not be so cheery on Main Street.
In case you missed it, the nation’s consumers spent 0.2% less in April than they did in March. Most analysts were expecting a flat reading or even a rise to 0.1%.
Scanning through a list of the market’s biggest losers today, it is pretty obvious almost all stocks are shedding plenty of valuable points today.
But which stocks are leading the charge today? If you have been reading my articles over the past couple of months, it should not be hard to figure out today’s weaklings. It is the hype-based, over-branded stocks that I absolutely cannot stand that are taking a big old shot on the chin.
Sirius XM Radio (NASDAQ:SIRI) is down 6.5%
Under Armour (NYSE:UA) is down 6%.
And Crocs (NASDAQ:CROX), oh boy, it’s down 12% and showing signs of even further weakness. From $3.75 to $2.25 in a week. I hate to say it, but I will: I told you so.
Hmmm, imagine that
There is an important lesson to be learned from this action. (Always follow my advice?) Stay away from high-beta positions when the market is obviously top-heavy. Sure, these plays are great when the bulls are in charge. But when it slides, the pain is horrific.
Sirius and Crocs both have betas of over 2. Under Armour clocks in at 1.74.
What does it mean? It means these stocks are overly correlated with the overall market. They are filled with systemic risk.
High-beta plays have little to do with their fundamental value and tend to move more on market or economic news than the market in general. If you have a high-beta portfolio and a wicked report like today’s retail figures hits the Street, it will get hammered, no matter what it means for the company’s fundamental business.
With a beta of 2, a stock will make a move twice as strong as the overall market. If the S&P 500 drops by 2.5% like it has today, the stock will drop by 5%.
Now, obviously the inverse is true as well. When the markets surge, these stocks will double the gains.
It all comes down to timing. Buy at the bottom and you will beat the markets. Buy at the top and you will cry yourself to sleep at night.
Remember this: high-beta stocks are for traders, not long-term investors. F or the over-the-horizon folks, share price appreciation will still match the market, but the horrendous gyrations will lead to irrational decision making.
One day you will think the end is near. The next you will think you are the greatest investor ever. Just look at the folks constantly screaming about something at Sirius.
For the short-term folks, invest away. But do your homework. Be sure you are buying at the bottom and selling at the top. Even a slight misfire in timing could cause big problems.
Beta is like a loaded gun; good in the right hands, powerfully deadly in the wrong hand.
Next Article: Beijing pulls out of U.S. debt — their next move could make you gains of 1,389%!
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May 13th, 2009 at 11:04 am
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smart gay,it’s always easy to say after the sell off ” i told you”,but you didn’t told us thia is an up trend,they are going to see $4 etc etc..
where where you when the breakout came,maybe this is the time to buy again?