Geoff Considine

Why Volatility and Beta Matter

I wonder if The Motley Fool has published a retraction or a Mea Culpa?

finance.yahoo.com/echa...;range=1y;compare=ivv+...

Yes, Beta and volatility matter. Just ask people who invested in Morgan Stanley!

Why Volatility and Beta Matter

Beta measures the degree to which the market drives return---but it is a tendency and the strength of the tendency is also determined by R^2. Beta is not, strictly speaking, a measure of volatility--it is a measure of the degree to which something follows the market. Mr. Hanson's point that these high Beta stocks have done really well in a 12-month period when the market has rallied is meaningless--we fully expect that high-Beta stocks will have high returns when the market has been going up. I am not saying that you can predict market direction--I am saying that his observation just doesn't tell us anything. If you COULD predict market direction, you would want want high Beta in a rising market, etc. as you indicate---but I am not in any way advocating such a thing.

Why Volatility and Beta Matter

Hi FIG:

In the case of JNPR, this was an anecdote. In the case of analyzing Buffett's equity holdings using a quantitative portfolio tool and finding that the tool and Buffett agree on what makes a good portfolio, no tweaking was used--all default inputs on a tool that is used by many users. My analysis has been supported by work that followed by two other experts---I'd be happy to refer you if you wish. A good portfolio tool using quantitative methods is actually in very good agreement with Mr. Buffett, even coming from different angles. There is no proof in my article--I agree with that. This article shows a few examples. There is no proof in investing theory anywhere.

Why Volatility and Beta Matter

To make this whole story even more bizarre, this article was just posted on The Motley Fool:

www.fool.com/personal-...

This article is by Tim Hanson, the same guy who told us to ignore volatility, but this one says that you need to avoid things that are too risky...um, volatile...have Betas that are too high, etc.

Why Volatility and Beta Matter

Hi Jordan (part 2):

Also, neither QPP nor Mr. Buffett would have thought that JNPR looked like a great deal at $100---I think that Warren Buffett inherently balances risk considerations in his portfolio management. I don't know how he does it because he eschews quantitative methods, but BRK's holdings look great in QPP, as I mentioned.

Why Volatility and Beta Matter

Hi Jordan:

First, one of the problems with the word 'risk' is that it means different things for different people. Volatility equates to risk if you cannot get a decent return over your investing horizon. MBA's probably think of risk differently from many individual investors--you are correct. Volatility aligns with risk when you have some chance of needing your money when your portfolio is not in a good position. If you are saying that you think of risk only as default risk (permanent loss of capital--as you say above), they are actually still related. If you read about the methodology of credit ratings in modern practice, volatility and default risk are related.

Second, I am a Buffett fan (Warren and Jimmy, actually). Mr. Buffett (Warren) unfairly discounts Beta and volatility as meaningful metrics--that is my point. A big decline in price may have a positive, negative, or even no impact on volatility.