Beta Not

Why don't I don't find the statistical models currently in use to be relevant, let's start with Beta.
If you look at both the Capital Asset Pricing Model, and Jensen and Treynor ratios, you will see formulas for calculating them. I'm not going to write up any more formulas that necessary, so if you want to see them, go to Google or Investopedia.
In each of these models, there sits Beta.
You can find a thorough discussion of Beta on Wikipedia as well, along with a criticism that conforms to my gripe about this allegedly magical statistic. The only magic is that it is not the same today as it was yesterday, but then, neither are you.
Every day the market is open, the Beta changes for the market, and for individual securities in realtion to the market.
So, while Beta is supposed to measure how much stock A would go up or down relative to the market as a whole, it only does so in the context of the past. It tells you what the stock did versus the market, not what the stock is going to do versus the market. But Beta is almost never presented that way. Advisors always say stuff like, "If the Beta is 1.3, that means that if the market goes up 10%, we can expect the stock to go up 13%."
NO, you can't. If you bought the stock last week, or last year, and measured it's performance against the market for that same time period, then the stock performed (PAST TENSE) 1.3 times better or worse than the market. You calculate a new Beta next week or month or year and you will get a different number.
You cannot know the Beta unitl the race is over, not at the beginning, and you can't place your bets at the end of the race.
The problem is, the guts of the formula for Beta change with every move in the market, so it is variable. And using it to calculate Jensen Alphas, or Capital Asset Models or Treynor ratios only plugs in a moving target, but pretends it's a static fact.
Nothing tells you what a stock is going to do, or what the market is going to do.

Laugh or Cry

Gaaah!!! Having fun with CE credits. I'm revisiting the reasons why I don't work in the business any longer. I want to keep up with the CFP certification, been one since the mid-eighties. In all the years I've had it, when I worked in the business, I never got a single client because I was a CFP. So why keep up the certification? Good question. Particularly now that I don't do 'clients' nor am I affiliated with any broker dealer or planning group.
When I get a good answer, I'll let you know. For now, the answer is to keep up with all the ridiculous notions the industry foists on its representatives.
See, the industry believes that if you can calculate stuff like coefficient of variation, correlations, and know what Beta is, you can give better advice on constructing portfolios. This is, of course, useless for the most part.
The reason it's useless is that it tells you statistics about past performance. We know, if you've read some of this blog, that data about the past is virtually useless in predicting the future. Still, they persist.
It's Wall St. magical thinking. Repeated at 'hedge' funds, mutual funds, independent money managers. They think if they can just hone their numbers, they can get an edge on the rest of the market. I call it throwing more math at the problem.
It would be great, if it worked, but it doesn't.
That said, the CFP Board does provide much needed oversight in the advisory community. Keeps an eye on their members, and is diligent about rooting the bad guys out of the business. It also offers useful tools for getting a proper portfolio set up, and encourages fiduciary diligence in client relations. They even remind members that the math is far from perfect as the sole method of selecting investments. I admire their insistence on taking the client's temperature regularly, and acting with integrity.
I have demonstrated, using math strangely, that there is no way to 'outperform' the market in the long term. And the people who do it for one, two, or even five years in a row are merely on the right side of a coin flip. (See The Only Investment Formula You'll Ever Need 07/17/07.)
Why do I warn about the overuse of statistics? In upcoming posts, we'll talk about it, hopefully without choking on the math.
I'll leave this post with a question or two.
What does the Capital Asset Pricing Model and the Treynor Ratio have in common? And, why does it make them valueless in measuring investments?

401k Costs...New York Times Article

Click the title, read the article. If your employer is already providing a low cost 401k, congratulations. If not, here are options.