The Stock Beta Measure and Value Investing

Value investing is an investment style which “favors good stocks at great prices over great stocks at good prices”. The approach is based on the principle that stocks are not always priced efficiently. With this in mind, value investors seek to acquire stocks that are currently trading at less than their perceived (“intrinsic”) worth. These investors believe that the market tends to overreact to news, both good and bad, resulting in unreasonable price swings that create investment opportunity.

The core of the approach is to utilize fundamental research to find stable companies that have temporarily fallen out of favor, but still look to offer good prospects for future growth. The value investor engages in thorough research to examine fundamental strength and project future performance.

Beta is a measure of a stock’s price volatility in relation to the rest of the market. While the market in its entirety is assigned a beta of 1, a beta greater than 1 indicates that the stock fluctuates farther in the same direction, while a stock with a beta less than 1 moves less in the same direction or in the other direction.

How important, if at all, is a stock’s beta measure to a value investor? Many would say “not at all”. While beta measures the fluctuation of a stock price, the value investor is only looking to see if the stock is currently priced at a bargain given its long-term value. The value investor is concerned with how the company performs, not with how the stock performs in relation to the overall market. They seek to minimize risk through efforts to gain a thorough understanding of the company and its future prospects.

Beta may be useful to the value investor if the measure provides an indication of an underlying weakness in the company. The savvy value investor, however, will have uncovered such concerns as part of their due diligence on the company of interest.

________________________________________________________________

The above information is educational and should not be interpreted as financial advice. For advice that is specific to your circumstances, you should consult a financial or tax advisor.

« The Strategy and Risk of Short Selling | Home | Benjamin Graham Stock Valuation
Using Net a Current Asset Value Calculator »