Tom (and-or anyone else who wants to jump into this):
I don't mean to overly complicate this, even though I am probably doing it, but it sure seems that if betas are a significant and-or meaningful tool in effective AIM stock selection that it is important to know exactly what it is measuring and how -- otherwise the inclusion of stocks with it as a given level may end up being no more than coincidentally rather than causally related to anything meaningful.
Let me start this missive by noting that I read at several sources today, and this is consistent with VL's general statement of a long term look, that commercial and professional sources typically measure beta over a five year span -- assuming it is available.
If the beta is measured above one as same direction but more so the higher the number gets and under one (as a negative reflection relative to the index used) as opposite direction and more so the lower (further below one and closer to zero) the number gets, then the .16 beta that a couple of sources had for APOL makes perfect sense since that would indicate a large move opposite the direction of the market over the five year time span. Such a scale, without using negative numbers, however could only measure within a band of one each direction since that is all that is available on the downside. This, however is inconsistent with VL's statement that a 1.25 means a 25% greater move. This reasoning would result in 100% greater movement at a beta of two, a 200% greater movement at a beta of 3, and so on. The problem is that there is no such way to measure an inverse movement beyond zero on the same scale. Stated differently, how would one measure a 200% inverse relationship? Thus, an inconsistency and dilemma I have no way of resolving, or more appropriately cannot understand how to resolve, from a conceptual point of view.
The long post with links I posted earlier contained a number of links to sources pointing out that beta bears no meaningful relationship to the likelihood of making money on a given stock and that any anecdotal relationships are most likely coincidence. Given the five year period over which it is measured may partly explain this. No other tool used for evaluation expects that what a company's stock price did over the last five years will translate into what it is likely to do in the future. The most obvious reason for this is that it tells us nothing about the trend of the beta or what it has done most recently, both of which are likely more meaningful indicators of near term stock price movement. For example, measured over a 5 year span a stock could have a beta of 1.5, but also have a trailing 3 month, 6 month, and-or 12 month beta that was any other number -- 1.4, 1.3, 1.2, 1.1, 1.0, 0.9, 0.8, etc.; betas that would be a more accurate measurement of more recent trends and activities and thus could significantly influence judgment in the "what have you done for me lately" analysis. This would also seem to be a particularly appropriate consideration for AIM selection since a more recent beta of 1.0, despite a long term beta of say 1.5 could indicate a stock with slowing movement relative to the market that was far less desirable than one with a long term beta closer to one, but a shorter term beta and trend greater than and away from one.
Of course, that does not explain the .75 beta from Value line, which relatively speaking would be equivalent to a 1.25 on the positive correlation side, unless the method of doing it weekly with averages somehow significantly distorts the longer term picture. By this I mean that it could be that on a relative weekly basis, APOL only moved 25% inversely to the index, even though over time that resulted in a 500%-600% real inverse relationship of the relative levels of the stock price and the index. Mathematically, I am not sure that is possible, but I have not taken the time to manually figure it out. I suspect that it is not possible since I bet that we could all easily find 1.25 beta stocks that are not 500-600% greater and in the same direction as the index over the last five years -- even though some may coincidentally be so.
It looks like I need to do some more reading as well as seeing if there is a source for more recent betas or beta trends or a fairly easy way to import the data and self-calculate it. As always, if what I have said makes no sense or seems flawed, I sure want to hear about and understand why.
Troy
Those who shoot from the hip usually end up just shooting themselves.
Plan the grub and grub the plan.
Where is the party tonight? Who is bringng the drinks?
