Value Investing In Your Car Episode 16 – Why Beta Is Useless

In these Value Investing In Your Car Episodes, we talk about mental models: when does value investing work best, where it works, you get book reviews, the most important thing I learned in 2017, how to learn faster, useless investing metrics, and much more…

If you want to learn from the other episodes in this series you can watch the entire playlist here.

In this week’s video, we continue a mini-series, within this larger series, about the four most useless value investing and financial metrics and terms.

Here I detailed why P/E is useless…

And today I’m telling you why beta is useless as well.

In the 11 – minute video above, I detailed the following reasons why beta, like P/E, is completely useless.

• Why it’s useless
• What it measures – supposedly
• Why volatility does not equal risk
• Why I NEVER use it
• And more…

And if you want to learn more about what two of the greatest value investors ever, Warren Buffett and Seth Klarman, say about beta, click here.

Here are Klarman’s thoughts on beta from the article: excerpt from his book Margin of Safety…

“I find it preposterous that a single number reflecting past price fluctuations could be thought to completely describe the risk in a security. Beta views risk solely from the perspective of market prices, failing to take into consideration specific business fundamentals or economic developments. The price level is also ignored, as if IBM selling at 50 dollars per share would not be a lower-risk investment than the same IBM at 100 dollars per share.

Beta fails to allow for the influence that investors themselves can exert on the riskiness of their holdings through such efforts as proxy contests, shareholder resolutions, communications with management, or the ultimate purchase of sufficient stock to gain corporate control and with it direct access to underlying value.

Beta also assumes that the upside potential and downside risk of any investment are essentially equal, being simply a function of that investment’s volatility compared with that of the market as a whole. This too is inconsistent with the world as we know it. The reality is that past security price volatility does not reliably predict future investment performance (or even future volatility) and therefore is a poor measure of risk.“

What are your thoughts on beta? Do you ever use it? Do you find it of use in any way? Let me know in the comments below.

P.S. If you’d like to learn how to value and evaluate businesses like a world-class investor, check out our three programs that can help you do this…

Our Value Investing Training Vault, our Value Investing Masterclass, and our $10,000 Coaching Program.

P.P.S. I’m giving away FREE copies of my acclaimed value investing education book, How To Value Invest. To get your free copy, go here.