About thirty years ago, statisticians armed with all their statistical theories began to confront the financial markets. A handful of useful tools have emerged that the average investor should be aware of when looking to buy stocks.
One secret that “in the know” people use is “BETA”. “Beta” is a number that reflects the volatility of a stock relative to the market. This number is also quoted on most quote services, so it’s easy to access, but I’ve often found that it’s never set. A BETA of 1.00 means that on average, a stock has always matched market movements both upward and downward. A BETA above 1.00 reflects above-average market volatility, and a BETA below 1.00 indicates below-average market volatility. When a BETA is less than zero, it indicates that the stock is moving unlike the general market, falling in bull markets and rising in bear markets. Previously, gold mining stocks had negative betas. Internet stocks, for example, have very high betas.
Many analysts who walk through your TV screen and make recommendations use BETA as their primary scouting device to find suitable investments. So the next time your broker calls with an investment recommendation, ask them what BETA is, and then enjoy the silence on the other end of the phone. Then send him a copy of this article!