Thirty years ago, statisticians armed with all their statistical theories began to clash with financial markets. There are a handful of useful tools that the average investor should be familiar with when he wants to buy stocks.
One secret that people “know” is “BETA”. “Beta” is a number that reflects how volatile the stock was relative to the market. This number is also listed on most quotes, so it’s easy to get to, but I’ve often found that it’s never defined. A BETA of 1.00 means that, on average, stocks traditionally coincide with market changes both up and down. BETA greater than 1.00 reflects above-average market volatility, and BETA less than 1.00 indicates below-average market volatility. When BETA is less than zero, it means that stocks are moving opposite the general market, falling in bull markets and rising in bear markets. Sometimes it is the case that gold mine stocks had negative beta values. Internet stocks, for example, have very high beta values.
Many analysts who cross your TV screen and make recommendations use BETA as their primary checking device in search of suitable investments. So the next time your broker calls with an investment recommendation, ask him what BETA is, and then enjoy the silence from the other end of the phone. Then send him a copy of this article!