logo
  Join        Login             Stock Quote

Everything You Thought You Knew About Investing Is WRONG – Find Out Why!

 June 07, 2012 03:40 PM
 


(By Rich Bieglmeier) Since caveman investors discovered fire and the wheel, stock market participants have operated under the assumption that more risk equals more reward. It's a basic tenant in the halls of the finest academic institutions and research departments across Wall Street.

Guess what? It's all wrong according to a new study entitled Low Risk Stocks Outperform within All Observable Markets of the World. The authors, Nardin L. Baker and Robert A. Haugen say "The fact that low risk stocks have higher expected returns is a remarkable anomaly in the field of finance. It is remarkable because it is persistent – existing now and as far back in time as we can see."

[Related -Family Dollar Stores, Inc. (NYSE:FDO) Q1 Earnings Preview: What To Watch?]

The study was conducted by breaking stocks into deciles, quintiles, and halves based on the volatility of total return for each company, in each country, during the previous 24 months. The winning portfolio consists of the 10% of stocks with the lowest standard deviations. At the start of each month, the screen is repeated, and the groupings rebalanced.

Going back to 1990, Baker and Haugan report "past volatility is a good predictor of future volatility. In the Universe and in each individual country low-risk stocks outperform." And Facebook (FB) sings, how ya' like me now.
Return Vs Risk Study Chart

[Related -Sector Detector: Is There Still Enough Fuel In The Bulls’ Tank?]

(click to enlarge)

Source: Low Risk Stocks Outperform within All Observable Markets of the World

Since 1990, low volatility stocks have outperformed their high risk cousins on a three-year rolling basis nearly constantly, with only two extremely brief bouts of subpar returns.

The study points out that high volatility stocks "tend to be noteworthy, often by virtue of receiving media attention. Because the flow of new information about these stocks is relatively intense, stocks of this type tend to exhibit higher than average volatility."

The research shows "volatile stocks are, in fact, covered more intensely by the media" with the number of stories on the Dow Jones Wire ranging from 7,220 in 1990 year to 17,778 in 2011.

The evidence suggests the more attention a company receives in the press, the more likely an analyst will cover it. In fact, the largest 1000 U.S. stocks are the most widely held, are "more volatile," and "attract more analysts' coverage."

The moral of the story is to forget everything you always believed about risk and reward, ignore companies highlighted on CNBC or the financial papers on a regular basis, and if XYZ Corporation has 20 analysts opining, disregard their advice and look elsewhere because each is leading you down a path of high risk and underperformance.

Lest you think we'll leave you hanging, iStock screened all companies that are $3 or more and trade an average of at least $500,000 a day. From there, we ranked the nearly 3,000 qualifying companies based on their volatility of total return for the past 24 months. Then, we created 10 buckets based on standard deviation, from lowest to highest.

With roughly 300 equities in each group, unless you are a multi-billion dollar hedge fund, nobody can buy all 300. The average investor needs to be a bit more discerning. Once again, iStock did the work for you by screening the lowest volatility stocks for some of our favorite technical analysis buy signals.

Thirteen of the 300 popped out, they include:

ALLETE, Inc. (ALE)
American Tower Corporation (AMT)
Ecolab Inc. (ECL)
Jack Henry & Associates Inc. (JKHY)
LTC Properties Inc. (LTC)
PG&E Corp. (PCG)
ProAssurance Corporation (PRA)
The Clorox Company (CLX)
Dollar Tree, Inc. (DLTR)
Kimberly-Clark Corporation (KMB)
Southern Company (SO)
Piedmont Natural Gas Co. Inc. (PNY)
Allied World Assurance Company Holdings, AG (AWH)

iOnTheMarket Premium
Advertisement

Advertisement


Post Comment -- Login is required to post message
Name:  
Alert for new comments:
Your email:
Your Website:
Title:
Comments:
 

rss feed

Latest Stories

article imageDelta Air Lines (DAL): Panic Selling Makes This Airline Stock Ripe For A Quick Pop

If there ever were a teaching moment in the stock market, it was this week. Earnings, trendlines and read on...

article imageInvesting In The Time Of Ebola

Volatility is back in the market. Whether we are being tossed and turned by the Ebola crisis, Russian read on...

article imageMarket Volatility Continues But Is Bottom In?

The market’s volatility continues, and it has the outlook and expectations of the financial media jumping read on...

article imageBrazil's Petrobras Attracts Bullish Options Play

Brazilian stocks advanced with ADR shares in state-owned oil company Petroleo Brasileiro SA (Ticker: PBR) read on...

Advertisement
Popular Articles

Advertisement
Daily Sector Scan
Partner Center



Fundamental data is provided by Zacks Investment Research, and Commentary, news and Press Releases provided by YellowBrix and Quotemedia.
All information provided "as is" for informational purposes only, not intended for trading purposes or advice. iStockAnalyst.com is not an investment adviser and does not provide, endorse or review any information or data contained herein.
The blog articles are opinions by respective blogger. By using this site you are agreeing to terms and conditions posted on respective bloggers' website.
The postings/comments on the site may or may not be from reliable sources. Neither iStockAnalyst nor any of its independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. You are solely responsible for the investment decisions made by you and the consequences resulting therefrom. By accessing the iStockAnalyst.com site, you agree not to redistribute the information found therein.
The sector scan is based on 15-30 minutes delayed data. The Pattern scan is based on EOD data.