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Author: Larry01Gott Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 3433  
Subject: NTE Beta, and betas in general: Date: 9/29/2003 11:06 PM
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Danish says, "Even if NTE's beta is 1.2 in my stock program, it certainly feels like 1.9."

Danish, I've been calculating my own Betas for about 4 years for that very same reason -- the basic inaccuracy of the financial services' beta. But first, this for everybody:

What is Beta?
Beta is a measurement of the volatility of a stock compared to the market in general. [Usually to the universe of stocks on US exchanges]
Volatility, used in this sense, means "amount or degree of responsiveness to market moves and direction".

The average beta is approximately 1.00, and stocks can be much less volatile than the market (boring), or much more volatile (ballistic).

How do I use beta to help determine approximate price movement:
Here are four examples, during a week (or month, or any period) where the market moves 10% [theoretically, up or down]:
1. A stock with a beta of 1.00 will tend to move approx 10% when the market moves 10%.
2. A stock with a beta of 2.00 will tend to move approx 20% when the market moves 10%.
3. A stock with a beta of 0.60 will tend to move approx 6% when the market moves 10%.
4. NTE, with a stated beta of 1.20 will tend to move 12% when the market moves 10%.

Except for this problem:

Danish hit on the problem, when he said concerning NTE, "It certainly feels like 1.9"

It OUGHT to feel like 1.9 -- its actually much higher than that!

My calculation of NTE's beta since Dec 31, 2002 (a market low) is 2.79. So if the market moves 10%, NTE is going to move approx 27.9%. Now that's more like the real world! And what's more, NTE's beta is increasing slowly all the time.

I am in the midst of adding my beta calculations to my master spreadsheet, on all the stocks I am monitoring. I'm about 60% done alphabetically, and here are just a few of the ones I have calculated from 12/31/02 to the present:

APPX-American Pharma Partners: 2.85
ASIA-AsiaInfo Holdings: 4.10 (my highest to date)[when the market moves 10%, ASIA moves 41%]
CHINA-chinadotcom: 2.88
CSCO-Cisco Systems: 1.58
DELL-Dell Computer: 0.84
ERES-eResearch Tech: 2.57
INTC-Intel: 1.34
LEXR-Lexar Media: 2.96
MRGE-Merge Technol: 3.46
MSFT-Microsoft: 1.09
NTE -Nam Tai: 2.79
NTES-Netease: 3.50

That's where I've stopped.

How is knowing beta helpful in buying stocks?
High-beta stocks are for the more aggresive investor.
Low-beta stocks are for the more safety conscious.
High-beta stocks are great when the market is going up, bad when the market is going down.
Low-beta stocks are great when the market is going down, bad when the market is going up.
High-beta stocks have fanatics (like many of us ) following them -- alternately in ecstasy one day, and despair the next.
Low-beta stocks are like watching paint dry.

There is only one characteristic that a company can have that can overcome what I have said in the comparisons directly above: Those companies with high rates of growth. Their natural upward momentum, helps overcome beta on the downward side, and to accelerate it on the upward side.

Hopefully, this helps more than it confuses.

There you have it.
Everything you wanted to know about beta, and MUCH, MUCH, MORE!

Larry
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