You ‘beta’ know what you are doing in this market
How do I get the two main f inancial emotions ( greed and fear), which bump heads on a daily basis, to l ive together in harmony? The good news is that I have the answer: own investments with the lowest risk and the best returns. The bad news is that no one really knows how to apply this solution to the problem.
Most investors today fit one of two personas: long-term investors who do not mind short-term volatility, or shortterm speculators who still believe that the probability of share price increases is good. It certainly wouldn’t be a bad idea for the latter to take a closer look at the THE Top five correction beta value of their investments right now.
The beta def i nes t he potential volatility of your share’s return or decline, compared to the volatility of the overall market or index. Simply put, if a share has a beta of 1, it means that for every percentage point that the market moves up or down, your share price will move up or down by the exact same percentage.
It’s not a bad idea to shift your focus towards low beta shares for the time being. That way, should the analysts’ predictions be correct in that the market will rise, you will still benefit, and should their predictions be wrong, your chances of losing more in a market decline are so hi ghe st an d lo west BETA share of 2008 (exclu din g divi den ds)
s durin Top 5 Lowest BETA (12 month s)
22 May ’08 to 20 November ’08
g the much lower.
With the last great correction, the market declined by 46% between May 2008 and November 2008. Interestingly enough, the top five shares (companies) out of the top 60 largest companies on the JSE that traded at the highest betas declined by a larger percentage and ended this period with a total decline of 57%. The top five shares that traded at the lowest betas, however, didn’t even decline by a quarter of the market’s total decline over the same period.
By using the criteria of shares on the JSE with a market capital of more than R10bn, which have the lowest betas and for which analysts still predict good growth, the results were the following f ive shares: Nampak, Netcare, PPC, Reinet and Tsogo Sun.
After applying this process, I found it interesting that the five lower beta shares have grown by 59% in the last three years when compared to the 52% growth of the FTSE/ JSE All Share Index (both excluding dividends). I’m all too aware of the fact that historical performance bears no guarantee for future performance, but the data does give us a good indication of the fact that you don’t have to take higher risks in order to enjoy higher returns.
Invest with your mind and keep your emotions out of the management process completely.