## Pete Wargent blogspot

Co-founder & CEO of AllenWargent property advisory, offices in Brisbane (Riverside) & Sydney (Martin Place) - clients include hedge funds, resi funds, & private investors.

4 x finance/investment author - 'Get a Financial Grip: a simple plan for financial freedom’ (2012) rated Top 10 finance books by Money Magazine & Dymocks.

"Unfortunately so much commentary is self-serving or sensationalist. Pete Wargent shines through with his clear, sober & dispassionate analysis of the housing market, which is so valuable. Pete drills into the facts & unlocks the details that others gloss over in their rush to get a headline. On housing Pete is a must read, must follow - he is one of the better property analysts in Australia" - Stephen Koukoulas, MD of Market Economics, former Senior Economics Adviser to Prime Minister Gillard.

"Pete Wargent is one of Australia's brightest financial minds - a must-follow for articulate, accurate & in-depth analysis." - David Scutt, Business Insider, leading Australian market analyst.

"I've been investing for over 40 years & read nearly every investment book ever written yet I still learned new concepts in his books. Pete Wargent is one of Australia's finest young financial commentators." - Michael Yardney, Australia's leading property expert, Amazon #1 best-selling author.

"The most knowledgeable person on Aussie real estate markets - Pete's work is great, loads of good data and charts, the most comprehensive analyst I follow in Australia. If you follow Australia, follow Pete Wargent" - Jonathan Tepper, Variant Perception, Global Macroeconomic Research, and author of the New York Times bestsellers 'End Game' and 'Code Red'.

"Pete's daily analysis is unputdownable" - Dr. Chris Caton, Chief Economist, BT Financial.

Invest in Sydney/Brisbane property markets, or for media/public speaking requests, email pete@allenwargent.com

## Tuesday, 20 December 2011

### 2011 - high Beta, high pain

So the Aussie stock market is down 12% for the year (so far!).
But there are plenty of stocks that are down a lot more than that; some are off by 50% or more.
Why?  Because, simply, some stocks are more volatile than others.  The measurement of volatility* is known as Beta or:
β
A stock that moves up and down perfectly in line with the overall market is said to have a Beta of 1.
A stock that is only half as volatile (i.e. it only moves up and down half as much in magnitude) as the overall stock market is assigned a Beta of 0.5….and if it is twice as volatile as the market is said to have a Beta of 2.
Westfield is an example of a stock in today’s market with a relatively low Beta.  It doesn’t shoot upwards in value in a boom period, but nor does it fall very sharply in times of stock market distress.
Westfield pays a high dividend and investors tend to stay the course.
Small and speculative stocks tend to have higher Beta values and are more volatile.
This is useful to know when the stock market is booming back from a crash, as giving yourself exposure to high Beta stocks can result in great capital returns.
The big problem for 2011 was that everyone thought we were due to continue recovering nicely from the 2008/2009 meltdown...and it certainly started out that way.
Then the tide turned on debt fears and those with massive exposure to volatile stocks are nursing some horrendous losses.
This is why you often hear reference to risk and return in the market being linked.  The fastest capital gains (and losses) are often those obtained by exposure to riskier stocks.
***
*and if you really care, how it’s calculated is at the bottom of the post.

The Beta value is a key variable in the CAPM model which attempts to determine a theoretically appropriate required rate of return of a stock - if that stock (or other asset) is to be added to an already well-diversified portfolio, given that stock’s non-diversifiable risk.

The theory made for a great University thesis but it doesn’t really stand up and here’s why:

If the stock market crashed tomorrow and BHP’s share price fell from $35 to$20 per share, according to the CAPM model, BHP would be a more risky purchase.  Why?  Because it has just become more volatile.

In reality, if the underlying economics of BHP are unchanged, I would far rather buy it at $20 than$35 thanks very much.  It’s common sense, right?

In other words, like many of the classical theories of finance, it’s a clever theory for the mathematics boffins, but in the real world, it’s a load of tripe.  As Buffett has proven over decades of outperformance.

***

Currently in Meningie at the start of the Great Ocean Road, on the limestone coast.

Staying on a beautiful lake (Lake Albert).  About 3 days drive to Melbourne for Xmas from here.

Beta formula:

$\beta_a = \frac {\mathrm{Cov}(r_a,r_p)}{\mathrm{Var}(r_p)},~$