This is the summary of Episode 9 of our Roaming Returns Podcast.
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Podcast Summary
Beta
What Is Beta
Beta is the measure of an investment’s sensitivity to market movements. It compares the price volatility of an investment to that of the benchmark index.
The measurements go back over a 5 year period in order to capture and calculate the metric. Stocks and funds have betas. Bonds and preferred shares do not.
So basically let’s look at 3 different stocks in the S&P 500.
Stock A has a beta less than 1.
Stock B has a beta equal to 1.
Stock C has a beta greater than 1.
If the S&P goes up 1% on a given day each stock will move the following.
Stock A will go up less than 1%.
Stock B will go up 1%.
And Stock C will go up more than 1%.
Generally stocks with betas greater than 1 are more volatile than the market. A beta equal to 1 means that the stock moves pretty much lock step with market moves.
Stocks that have a beta less than 1 move much less than the market. There’s even negative beta stocks that move out of sync with the market, but you don’t see too many of those.
Beta is super important if you don’t have the stomach for risk.
Beta And Risk Aversion
If you’re a risk averse investor you want to focus on stocks with beta’s that are less than 1. The closer to zero the better. (But don’t go into the negatives. Those do some weird things.)
You really need to determine your risk tolerance before investing. See the episode on Investor Profiles. A natural part of low risk tolerance means that you have to trade off the big upswings.
Low betas generally don’t have the upside but they also don’t have the down side. These low beta stocks are idea for portfolio value preservation.
We highly recommend implementing a lower beta strategy before ever implementing stop losses. Those are ungodly risky especially in volatile stocks.
The other ways to limit your down side are to invest in preferred shares (Episode 7), bonds (Episode 5) and CDs. If bonds had betas, the good ones would be around a 0.25 beta. For preferred shares, look at the common stock’s beta and cut it in half. That’s Tim’s rule of thumb.
We don’t really like CD’s because of the lock up periods, especially when there are other options like Worthy Bonds (Episode 6).
Tip
There are ways to invest in some of the growth stocks like Apple. You can buy into funds with low betas that own other volatile stocks that you’d like without the down sides.
CALM
A great example of a company that fits our investing metrics and dividend strategy with a low beta is CALM. Their beta is 0.03. It’s one of the lowest ones we’ve seen.
CALM is a company that specializes in egg. They have all kinds of eggs.. organic, free range, hormone free and traditional eggs.
They pay anywhere between 4% and 15% dividends a quarter. They do have a variable dividend.
This company pretty much trades in a flat line. However, we saw a dip and bought in. It’s gone up since. We’re up 10% in a company with a beta that’s damn near zero, which is insane.
Tim’s Oracle Intuition Powers
It’s been frustrating for Tim not being able to communicate what he sees in stocks sometimes. He tends to notice things that tell him to get in or out of stocks which end up being pretty spot on soon after.
Carmela has learned to trust his instincts without him being able to convey why he knows something over many years. It’s just one of those things. And she’s come to realize that this “knowing” trait is stereotypical INTJ superpowers.
Even though he has this skillset, we never recommend timed buys based on his instincts. All of the information we convey to you is based on a honed strategy that is measurable and repeatable.
IEP Loss Mitigation
We took a pretty big hit in IEP when a short seller questioned the credibility of the company. After the panic sell, Icahn ended up having to cut it’s dividend because it fell so much.
We lost ~$6,000 in value in IEP but have made $3,500 in dividends. Tim keeps buying dips to average our buy price back in as he notices ideal setups.
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