re: Stocks...

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ETA: Oh and thanks for helping me procrastinate for another hour. This entire weekend was a complete fail.

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Same here.

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So where do the small caps we've played fall into?

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Beta greater than one
Correlation near zero

My email. I sent it to both of my finance professors, I hope this starts a battle between Phds, that would be pretty funny:

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Dear Dr. XX,

I know beta is not explicitly on our final, but I am studying for Level 1 of the CFA, and I am having a bit of a crisis of confidence, and I was hoping you could help answer my question.

I was under the impression that Beta measured an asset's volatility relative to the market's volatility. Since the market volatility is measured by standard deviation, which is directionless, I thought Beta was also directionless, and simply represented the magnitude of the volatility change, and not necessarily the direction. For instance, an asset with a beta of 2 would be twice as volatile as the market, but if the market moves UP 3%, the asset will deviate 6%, not necessarily go UP 6%. Not to say that an asset and the market cannot move in the same direction, but I was under the impression that correlation was a better measure of direction.

However, there was disagreement on this in a conversation I was having with some fellow candidates, where some people feel that beta represents both volatility AND direction. In attempting to figure out the answer, I leaned on correlation, but since the Beta coefficient is computed using covariance, which is itself a measure of correlation, Beta must measure correlation (and thus direction) as well.

There are multiple interpretations from respectable sources on the internet, so the only thing I could conclude, given my relative knowledge of statistics, was that beta measures both volatility AND direction, but that dividing covariance by standard deviation makes the correlation measured by covariance directionless. The ultimate question at hand is: is beta a proper way to measure correlation (direction), or should an investor use beta for magnitude (volatility, directionless) and correlation as a pure measure of direction?

Sorry for the long email, but it's really bothering me as it is kind of fundamental.

Thanks for any help.

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Do you daytrade rs?

Depends. If it's a stock I'm buying at what I think is the bottom, I load most of my position on the front end. If it's one that I just have to own now, but I think will likely drift lower in the near future, then I load up a little then save some powder to average down with later.

1. Fins (This trumps everything else. If fins suck, I usually immediately write the company off unless I find something that trumps fins or I find cause to believe the fins will soon be greatly improving.) Looking mainly for Revenue, Earnings, and Margin Trends; Low-Debt or Enough Cash to Cover Debt; Cash per Share; Ratio of Assets:Liabilities; Ratio of P/E to Expected Earnings Growth (PEG).

2. SEC filings: Looking for market capitalization; capital structure; dilution from options, warrants, or need for capital; competitive advantage; growth model; plans; anything relevant to value

3. Recent Press Releases/News Coverage: Read the most recent PRs as this info. likely won't be included in the company's 10-K or 10-Q if it develops after. Do the material events add or substract value from the company?

4. Technical Analysis: You've found a good buy, but is it a good buy now? Just because the fundamentals are good doesn't mean the stock isn't overpriced now. A meal at Ruth's Chris is a great meal (good fundamental quality), but not such a great meal for 10,000 bucks (bad technical quality). The same goes for stocks. Buying AAPL at 272 was a good fundamental buy (it's AAPL we're talking about here) but not a good technical buy (it was extremely overbought). Should use multiple timeframes here (daily 6 mo., weekly 2/3 year, monthly 5/10 year charts, etc.).

5. Fundamental/Technical Quality of Sector: AAPL can be performing well, but if Technology sector takes a hit, will AAPL likewise take a hit?

6. Fundamental/Technical Quality of Industry: AAPL can be performing well, but if Computer Hardware industry takes a hit, will AAPL likewise take a hit?

7. Fundamental/Technical Quality of General Market: AAPL can be performing well, but if the Dow takes a hit, will AAPL likewise take a hit?

7. There is more: What does the girl next door think of JOEZ? What does your grandmother's physician think of CLRT? What does your geology professor think of the demand for niobium? What do management's credentials look like? Are any of them near retirement/old age? For example, Stan Lee heads a company called POWN which ties his comics to movies for production, but by his own admission, if he dies the company will be virtually worthless. Stan Lee is an old mofo, if he gets diagnosed w/ cancer, investors will likely flee. We'll call this Category 7 "Practical DD". Ignore steps 1-7 and ask yourself, "Why do I like this company?", "Why do consumers like this company?", "What will cause this company to prosper into the future?"

This is a lot of stuff. I don't always go through each of these steps. Sometimes I look at techs alone. Sometimes I put more weight on fundamentals. Sometimes, I get a tip from a fellow investor of strong repute and I act without doing any DD, but this is rare and you should forget about it for now. Over time, you'll meet fellow investors whose words are as good as gold, partly because what they look for is in line with what you look for and their goals are in line with your goals.

This is not an exclusive list. For now, you should be concentrating on Step #1 as it is the backbone to everything else.

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We already covered that in this thread, and he didn't address my question at all that I can tell.

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Ha, you should have CC'd them both. May cause them each to attempt to outdo the other and provide for better responses.

Ha, man, even the guy who wrote the book is giving a grey answer to the question. My attempt to interpret, please respond in kind:

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But I would never say that it is correlation with market without being specific

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my point

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and certainly would never say it is correlation of volatility

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my point again (which is why you should use a correlation coefficient for that and not beta).

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I would also not say it is correlation of the direction of price movements.

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My point initial and overarching point.

The kicker:

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It reflects correlation of return but also volatility.

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You and RSBR's point. :blankstare: Back at square 1, that was completely circular.

Neither answer appears to be very black and white. If it's grey for these professors, no wonder it's grey for us.