dimanche 27 mai 2018

A return on the Beta coefficient

In august of 2014, I wrote a post about the beta coefficient.

It wasn't a masterpiece of litterature, but, I have to say that, after 4 years, I've never ceased to think that a low beta was something important. Of course, in a portfolio of 20 or 30 stocks, we should pick some stocks with a beta over 1 because some very great stocks have a higher beta coefficient. But I believe that, in a global portfolio perspective, we should target an average beta under 1.


Because most of the great stocks have a low beta. So, if your portfolio has a low beta, there's more chances that your stocks are good. The greatest stocks are highly predictable and are protected against a market correction. Well, they're not immuned to a market correction, but they resist better, because they continue to perform in a recession, which is not the case for all stocks. And we ask less questions about our picks when our stocks are less volatile. Some experts will deny this, but in my view, they're full of shit. Nobody likes to see their stocks drop 20% without any reason. 

 When I think about the canadian market, all the great stocks (or so) have a low or very low beta. For instance:

Alimentation Couche-Tard: -0,85
Metro: 0,01
Boyd Group: 0,13
Enghouse Systems: 0,22
Lassonde Industries: 0,24
Dollarama: 0,26
Constellation Software: 0,28
Open Text: 0,4
Richelieu: 0,46
CCL Industries: 0,66
MTY Food Group: 0,7
CGI: 0,73

Is it really a coincidence that this selection of 12 of the best canadian stocks includes only stocks with a beta under 0,75?

11 commentaires:

  1. I'm just curious what you think of Stella Jones, Jean Coutu, Richelieu Hardware and Ritchie Bros. Also low beta and great old Canadian companies. Non?

    1. Stella Jones: OK stock.
      Jean Coutu: great company with poor growth.
      Richelieu: I like it.
      Ritchie Brothers: good stock but very expensive.

  2. If you care to explore this topic further, do a simple google search like:

    low beta vs high beta stock performance

    There have been some very exhaustive studies done and it backs up what Professor Penetrator is saying. You would think that you have to take bigger risks and endure greater volatility to get the greater returns. It's simply not true. The less risky lower beta portfolios usually outperform the high beta portfolios. The numbers would not even do Professor Penetrator's argument justice precisely because somebody taking on too much beta will end up selling at the worst/scariest moments more often than not. Not everybody is cut out to endure huge swings in their volatile stocks. They won't even stay on the ride long enough to get the reward down the road.

    I will just link to an article from six years back by a director of research who is the author of over a dozen books. The article is entitled:
    Do high-beta stocks produce higher returns?


  3. This is interesting. As you can imagine I get bombarded by wholesalers to sell crap. We do our own research and populate portfolios with individual securities but we do have an watered down version of our models for smaller accounts that hold ETFs. The BMO low vol ETF actually holds a fair number of stocks that meet our criteria. Intuitively this makes sense. Good companies that have a good business model and can compound capital predictably should have stock prices (which of course is a reflection of the value of the company) that is less volatile than lower quality companies.

  4. I think beta is calculated for a specific timeframe. Using Enghouse as an example it may have a low, multi-year beta but a much higher 1 year beta.

  5. Vicario,

    Are you and your pal Donville moving the price of PATK? It seems to be on fire lately. Mind you, the company itself is committed to buying back $50 million in shares.

  6. I bought $6k worth for myself... so no big moving and shaking on this one from me. Beta is a weird calculation because it assumes symmetry of the returns. For example, if a stock goes up 10% while the market goes up 1% I think beta reads the same as if it goes down 10% while market is down 1%. I've always thought there should be a way to look at how a stock reacts to the upside versus downside. I don't pay attention to beta at all. It would seem however, that the stocks we like tend to have low betas. Also; as Edutrader noted, the timeframe in question is important when calculating beta. My 3 cents.

  7. I bought a 10K block of PATK last week as well. Always nice to see an instant increase in share price!

  8. I also don't give much attention to beta but it is quite interesting to see many of my favorites have beta of less than 1.

    However some of great growth stocks have beta of higher than 1.
    Alibaba- 2.6
    Amazon- 1.7
    Netflix- 1.3
    Apple- 1.1

    It is really a matter of what direction they are more volatile than markets to... Upward or downward.

    Negative beta would mean the stock is downward while market is upward or vice versa(the perfect example would be Couchetard :) )

    1. Beta is a correlation to an index and th de stocks are heavyweights in their respective index. Maybe that's why their beta is close to one

    2. Ce commentaire a été supprimé par l'auteur.