About thirty years ago, statisticians armed with all of their statistical theories began to confront the financial markets. A handful of useful tools emerged that the average investor should be familiar with when they look to purchase stocks.
One secret that people “in the know” use is “BETA”. “Beta” is a number which reflects how volatile a stock has been relative to the market. This number is also quoted on most quotation services so it is easy to get to, but I have often found that it is never defined. A BETA of 1.00 means that on average, a stock has traditionally matched the markets swings both on the upside and on the downside. A BETA greater than 1.00 reflects above average market volatility, and a BETA of less than 1.00 indicates below average market volatility. When a BETA is less than zero it indicates that the stock moves contrary to the general market, going down in bull markets and rising in bear markets.. It used to be the case that Gold mining stocks would have negative betas. Internet stocks for example have very high betas.
Many of the analysts that cross your TV screen and make recommendations use BETA as their primary screening device in searching for suitable investments. So the next time your broker calls with an investment recommendation, ask him what the BETA is and then relish the silence on the other end of the phone. Then send him a copy of this article!