Sticking with it: this round's pick: GYI
The only way I can really know if the Greenblatt strategy really works is if I stick with it, even when "Mr. Market" as Greenblatt calls it, is acting up.
This round's pick is Getty Images (I was spooked enough to pick something with a fairly large market cap at $1.8B), and I'm also selling Herbalife (HLF), for a gain.
Interesting counterpoint on Getty here. My involvement with content and digital-asset management suggests to me that replacing Getty with a wiki will take a mite longer than my 1-year investment horizon.
posted by Andrew Savikas @ 10:00 PM
4 Comments
4 Comments:
I assume when you say "spooked" that you're referring to volatility, but isn't that better represented by a low Beta rather than a high Market Cap?
That's true, Keith, though in general the two are correlated (i.e., small-cap stocks are often said to "outperform" mid- and large-cap stocks, but that's to be expected since they're generally riskier).
Using either measure, GYI is safer than my usual picks.
Beta only measures one type of risk faced by a company: the correlation between the stock price and major macro market movements. A small cap stock could have a low beta because it is in a niche industry that is unrelated to the market on the whole, but still be risky/volatile because it is a small business. I.e., a small company with a low beta can take a serious hit for many reasons (because an owner dies, bank financing runs out, a local natural disaster wipes out the small manufacturing plant) that typically would not have as much of an effect on larger companies.
Thanks Colin, that's absolutely true, though I might argue that since beta is typically measured empirically (and is reactive, since the data is historical), the risk characteristics you've described would eventually be reflected in that particular stock's beta, irrespective of the industry.
The circumstances you've described would clearly elevate the required rate of return for that stock, moving it above the SML, leading to a movement to the right (and an increased beta) to bring it back to the SML.
But you'll also notice I hedged my bets with "in general" ...
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