Please ensure Javascript is enabled for purposes of website accessibility

Don't Rely on This Stock Measure

By Selena Maranjian – Updated Apr 6, 2017 at 12:48AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Beta might be more meaningless than you thought.

Should you care about a stock's beta? I recently learned that it might be even less of a meaningful sign of a great stock than I'd originally thought.

But let's back up a bit and review what it is. Beta is a measure of a stock's volatility. A beta of 1.0 means that a stock rises and falls in sync with the overall market. A beta greater than 1.0 suggests wider swings, while a beta less than 1.0 indicates a sleepier stock.

Imagine that the stock of Meteorite Insurance (ticker: HEDSUP) has a beta of 1.2. If in the past, the market as a whole advanced 10% in a given period, Meteorite Insurance tended to advance 12%. If the market fell 20%, Meteorite Insurance typically fell around 24%. Conversely, if Acme Explosives Co. (ticker: KABOOM) has a beta of 0.50, it is roughly half as volatile as the market. With a market drop of 8%, we'd expect Acme to slump about 4%. With a market surge of 10%, we'd expect Acme to rise about 5%. Got it?

Beta in real life
Below are the recent betas for some of the Dow's components, just to give you a sense of how some major companies' volatilities compare. I'll also include their star rating from our Motley Fool CAPS community to give you an idea of how bullish on them our thousands of members are:


CAPS rating (out of five)


Wal-Mart (NYSE:WMT)



ExxonMobil (NYSE:XOM)



McDonald's (NYSE:MCD)



Microsoft (NASDAQ:MSFT)



Cisco Systems (NASDAQ:CSCO)



American Express (NYSE:AXP)



Bank of America (NYSE:BAC)



Data: Motley Fool CAPS, Yahoo! Finance.

As a long-term investor, I haven't paid too much attention to beta. Obviously, if I think the market's going to rise over time, I'd love to have a high-beta stock that outpaces the market's return. But as the examples above show, high-beta stocks during downturns are dangerous to your portfolio.

More importantly, when I buy stock in a company, I usually hope and plan to hang on for a long time. I also expect the stock to rise over that time, ideally substantially. So, to the extent that beta measures volatility, I don't care so much about it. As long as the stock grows over time, I'm not too concerned with how volatile it is as it advances. Many stocks that have proven to be wonderful long-term investments have been very volatile.

What's new?
Here's what I just learned, though: According to an article by researchers Pablo Fernandez and Vicente Bermejo from last month, beta measures vary widely from data provider to data provider. (They mentioned a range of 0.13 to 0.71 for Wal-Mart, for example.) One reason is that the number relies greatly on the time period involved. If one data provider calculates beta based on the past three years and another based on the past five or 10, their results will probably be quite different.

In addition, the researchers concluded that comparing betas of different stocks can be misleading, as even with a given set of data and method of calculation, beta values can differ, making it impossible to be sure that one stock's beta is actually higher than another's.

Lastly, the researchers found that returns of the vast majority of Dow stocks didn't correlate well with their calculated beta values. The researchers found stronger return correlations just by plugging in a fixed beta value of 1. That reduces its usefulness for many investing strategies.

So, even though beta can be interesting as a measure of volatility, don't give the measure more importance than it has. Even if past results suggest a stock will move in a certain direction, always keep in mind that future performance may take a completely different path.

Learn more:

For some pointers to promising stocks, check out our Motley Fool Inside Value newsletter. American Express, Microsoft, and Wal-Mart are just three of the stocks it currently recommends. Try it for free and you'll have access to all past issues and all stock picks.

Longtime Fool contributor Selena Maranjian owns shares of McDonald's, American Express, Microsoft, and Wal-Mart. The Fool owns shares of American Express. Try our investing newsletters free for 30 days. The Motley Fool is Fools writing for Fools.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Walmart Inc. Stock Quote
Walmart Inc.
$132.92 (-0.99%) $-1.33
McDonald's Stock Quote
$239.09 (0.25%) $0.59
Microsoft Stock Quote
$249.20 (0.13%) $0.32
American Express Stock Quote
American Express
$144.37 (-0.75%) $-1.09
Bank of America Stock Quote
Bank of America
$31.92 (-1.42%) $0.46
ExxonMobil Stock Quote
$99.12 (4.04%) $3.85
Cisco Systems Stock Quote
Cisco Systems
$41.99 (0.41%) $0.17

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

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 10/06/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.