Please find below our summary of a brilliant series of video presented by Rajeev Thakkar – CIO of one of the best mutual funds in the industry – PPFAS Mutual Fund. To watch the entire series please visit here: https://www.youtube.com/watch?v=QkPcfCRr0DY&list=PLLtUqNwAJJfPQXkx5d9mWwRwzedqtrwoh&index=2
In this blog we present our summary of the 6th video in the series where Beta factor has been discussed. (Emphasis Ours. The screenshots have been taken from the presentation given by Rajeev Thakkar).
In theory Beta and Volatility are technically are two different concepts.
Stock Beta looks at the volatility of an individual stock/portfolio in comparison to the market. Volatility looks at the extent of up and down movements in an individual stock/portfolio. However, we will be using the 2 concepts together in this presentation.
The Original Capital Asset Pricing Model: High Beta à Higher returns
But what do the results tell us?
Many papers/practitioners/ funds have advocated investing Low Beta, Low Volatility stocks!!!
In practice,
Low Beta/Volatility works BEST AND High Beta/Volatility do WORST whereas In between the high & low, results somewhat follow CAPM
Beta and Fundamental Value Investors
Renowned investors buffet, Munger, Klarman think Beta is worse than useless. According to them right definition of Risk is permanent loss of capital. Let us leave this aside and have another look at Beta.
Why are some stocks more volatile/high risk than others?
- Beta of 1 is equal of market risk
Higher than 1 is more risky
Lower than 1 is lower risk
- Penny Stock/ Lottery characteristic stocks
For example: Unitech Beta 2.14)
- Dependent of some events happening
Reliance Industries Beta: 1.31 (Jio Deals)
- High Leveraged
Tata Motors beta 1.88
- A tale of 2 Betas
HDFC Bank 1.05
Yes Bank 1.42
- Some more stock betas
HUL Beta 0.21
TCS Beta 0.71
Asian paints Beta 0.50
Nestle Beta 0.41
Marico Beta 0.35
Learnings
- Do not believe in High Risk – High return, you can create higher wealth with lower risks
- Beta on its own may or may not be a measure of risk. However, if some company otherwise looks good on financial and valuations but beta is very high, you need to investigate further.
- Unitech has higher beta, TCS, Asian paint etc have low beta, Yes bank having higher beta than HDFC bank. Don’t completely rely on Low Beta to buy and High Beta to avoid. It can be one of the metrics to sometime eliminate the riskier names.
Way Forward
- Passive investing – Index Funds, Active Investing – Fund manager and analysts decide what stocks to buy, Factor Investing can become a middle ground
- Pure active managers might find some tools from factor investing.
- Factor investing might not get commoditized, because all practitioners will have their own secret sauce of implementing factor investing
#ppfas_factor_investing #beta #valuations #investment_philosophy