WEALTH TIPSSome Greek Letters in Investing Gary Smith, DVM What style of investor are you Value, Trend, or Day Trader? Little known indicators about stocks can be very valuable tools in helping make a decision on investing. We have Alpha and Beta. ALPHA Alpha is used to measure performance on a risk adjusted basis. The goal is to know if an investor is being compensated for the volatility risk taken. The return on investment might be a better benchmark but still does not compensate for the assumption of the volatility risk. Alpha is a little more complicated to understand. We are going to spend more time on Beta as it is a more important indicator and is used by many to help make decisions on investments. BETA Beta is a measure of volatility of a stock versus the market. It is very simple and by following the beta on a stock you are interested in you can determine the risk of the investment you are considering. A beta of “1” simply means a stock moves roughly like the market. A beta above “1” means the stock is more volatile than the market, and a beta of less than “1” means the stock is less volatile than the market benchmarks. So why is this important? Let’s say you are value investor. Perhaps now you are even more worried about how markets are going to perform. I expect that some day in the near future the markets are going to collapse. We do not want to put all of our money in the bank. We may want safe investments; investments that I call boring and unattractive. These mostly are stocks that are wonderful boring companies that typically have low volatility and do not have huge moves either up or down. They pay a nice dividend and do not go down much in really bad times. So if the market tanks you will be fairly well protected on the downside. Let’s take Coke, Waste Management and Altria as examples. There are many stocks we can consider. For example -Waste Management is a very boring stock. Few people are interested in Waste Disposal. This is not a juicy stock but does have slow gains and pays about 2.5 % dividend. It is a company that grows its dividends every year like Coke, and constantly buys back shares. It recently raised its dividend 9.4%. During recessions Waste Management has had good success. It is a stock you can hold for many years with little to worry about. It has a low beta of about 0.6 which means it has low volatility. I am not suggesting you buy Waste Management but am merely using it as an example of a safe stock that historically has held up during the worst of times. There are many of these types of stocks. I personally have Coke, Altria and several other lower beta stocks and ETF’s in my retirement account. The dividends to me are most important in all retirement accounts. Research was done from the book “Boggleheads Guide to Investing” by Taylor Larimore et al, Warren Buffet and the book “Defying the Market” by Stephen Leeb. I hope you enjoyed this issue. We try to give you some tools to think about and encourage you do a little more research for your long term investment success. |