December 30 2022 Why are stock investors so obsessed with beta?

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Good question.

Beta is a measure of a stock's volatility in relation to the overall market. By definition, the market, such as the S&P 500 Index, has a beta of 1.0, and individual stocks are ranked according to how much they deviate from the market.

A stock that swings more than the market over time has a beta above 1.0. If a stock moves less than the market, the stock's beta is less than 1.0. High-beta stocks are supposed to be riskier but provide higher return potential; low-beta stocks pose less risk but also lower returns.

The obsession with beta is related to wanting to be able to predict how much higher or lower a stock might move. This general fascination is related to wanting to predict how to profit from market movements. Beta is important information to some stock market speculators.

However, beta is not so important to someone that is a longer term investor. More important is to look at what the company is worth as a going concern on a per share basis and then compare with the market price per share. A classic value investor is not concerned with beta.

I don’t use beta when I buy stocks and I don’t pay a lot of attention to it. Of course, it is nice to know about what it is and how it might be useful but trading stocks is not something I think makes a lot of sense. For me it is more interesting to buy a quality company and hold onto it for many years.

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I hope that helps and good luck with your investing!

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