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The Riskiest Bet in the Stock Market Isn't What You Think

By Tim Beyers – Feb 1, 2014 at 6:45AM

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Following modern portfolio theory can sometimes rob investors of the richest returns.

Too many investors fail to understand and account for risk when building a portfolio, Fool contributor Tim Beyers says in the following video.

How so? They think of beta -- a measure of volatility -- as a proxy for risk. Thus, instead of calculating the possibility of suffering a 100% loss of capital when investing in a new stock, investors settle for low-beta laggards that rarely move. History suggests that's a mistake.

Consider SunPower (SPWR -3.14%) and SolarCity (SCTY.DL), two titans of the solar movement focused on bringing photovoltaic power to residences around the country. Both stocks teeter around 4 when it comes to beta over the past year -- that is, they moved roughly four times the market average in 2013. They also delivered multibagger returns over the same period.

So stop ignoring high-beta stocks and start thinking differently about risk. Treat each stock you're interested in like the business it is. Study revenue, profit, and cash flow trends. Evaluate products and competition. Seek competitive advantages and then buy to hold for the long term. You'll end up with a better portfolio as you learn how to make volatility work for you, Tim says.

Now it's your turn to weigh in. What's the riskiest stock market bet you've made recently? Do you avoid or embrace high-beta stocks? Please watch the video to get Tim's full take and then leave a comment to let us know what you think.

Tim Beyers is a member of the Motley Fool Rule Breakers stock-picking team and the Motley Fool Supernova Odyssey I mission. He didn't own shares in any of the stocks mentioned at the time of publication. Check out Tim's Web home and portfolio holdings, or connect with him on Google+Tumblr, or Twitter, where he goes by @milehighfool. You can also get his insights delivered directly to your RSS reader.

The Motley Fool recommends and owns shares of SolarCity. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Stocks Mentioned

SolarCity Corporation Stock Quote
SolarCity Corporation
SunPower Stock Quote
$23.72 (-3.14%) $0.77

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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