Forum Archive Index - July 2002

["tennyson@caverock.net.nz" <tennyson@caverock.net.nz>]

Hi winner69,

>
>
>This chart (hijacked from investorschronicle.co.uk) shows the 
>performance of FTSE sectors over the past three months plotted 
>against the sector's beta (its volatility over five years) 
>
>src="file:///C:/My Documents/Peters/beta.gif"
>
>

Well, for those sharechatters who were able to wade through 
your HTML text, they wouldn't have found your link to the 
information much use.  The link to the chart you gave was on 
your own hard drive!

>
>
>The chart shows a strong correlation between returns over the last 
>three months  and beta ...in a market that has tanked. Sectors with 
>a low beta have performed far better than those with high beta. 
>
>


Translation:  Shares which run up because of high growth 
expectations, fall back faster when those expectations are not met.
You won't be putting any rocket scientists out of work with that 
statement Winner69!  

>
>
>Conversely you would want to stay out of high beta stocks like 
>FBU FFS CAH FOR THL ADV ITC BRY AIR and RBD
>
>


I think the idea of using 'Beta' as a buy sell indicator is a little 
simplistic.   Take FFS and AIR as an example.  There is no doubt FFS 
*has been* volatile over the last five years.  A huge capital bail 
out has cause the share price to tank.  But there is no reason to 
assume it will be in need of *another* bail out, nor is there any 
reason to assume that log prices will suddenly skyrocket.  Indeed, 
since the capital raising the FFS price has been *surprisingly 
stable*.  To suggest that the FFS share price will be highly unstable 
in the near to medium term, is, I think absurd.  The fact that FFS 
has a high Beta is of historical interest only.  

AIR, by contrast, is at an all time high in terms of price relative 
to earnings.  You could make an argument that AIR is *the* most 
expensive share on the sharemarket at the moment.  All it would take 
would be for the pilot to look out of the rear of his cockpit, see 
that he is carrying a plane load of naked emperors and the plane 
could go into a steep dive.  AIR is far more risky than FFS based on 
asset values, earnings, future outlook and just about any measure you 
care to name.

This then highlights two fundamental problems for 'Beta'.  It is 
based on historical share price performance, and there is no 
guarantee that yesterday's volatility will reflect tomorrows 
volatility.  Beta also makes no distinction between a share that 
suddenly surges or suddenly plunges in value.   Does this mean Beta 
is useless?  On its own, I would argue yes.

However, if you were a value investor, a solid share that has 
suffered a short term decline in value at above the rate of market 
decline (high Beta) might very well turn out to be an excellent 
investment.  I'll be keeping an eye on some of those high Beta shares 
over the next few weeks.   It could easily be that this will be a 
once in a decade opportunity to buy them.

SNOOPY




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Message posted by Harry Tennyson
 using Pegasus Mail 2.55
I have Word 97 to read attachments
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