August 23, 2023

Delivering Beta

It’s been a surreal week.  We’ve had a life-changing event, a terrifying experience. But it’s going to be okay.  Those of you in our close circle know.  We’re more reflective.

And I can’t let beta go.  I’m admittedly fixated on it.  Especially seeing what happened to Dick’s Sporting Goods and Macy’s yesterday. You see that?

Photo 14649967 | Alpha © Photoeuphoria |

It’s irrational for stocks to plunge that much. It’s irrational for well-informed money in this era of ubiquitous data to not know what companies are likely to report.

And it’s irrational for public companies to be releasing information in ways that destroy 20% of shareholder-value. A day will come when shareholders will hold you accountable, public companies, for not managing volatility better.

Because you don’t need to do that. 

True, you can’t control what machines do. And machines and derivatives are the demolishers of value, the creators of volatility.

So, don’t feed them.  Do you know what information is on feeds, machine-readable? You should.  Reduce the data that’s machine-readable. You are not obligated to feed arbitragers value-destroying comparatives. So, don’t.

We can help you. We have a methodology, a plan.

Which brings me back to beta. 

I’ve written about it here and here recently.  Beta isn’t volatility but the performance of the market.  Alpha is beating the market while doing what the market is doing.

It’s nearly impossible. About one percent of stocks consistently outperform the market – deliver “alpha,” or returns that exceed the amount of risk undertaken to produce them.

Yet every investor-relations department, every CEO and CFO, is expected to deliver alpha. It’s such a herd pursuit on Wall Street that CNBC has a conference called Delivering Alpha.

Except there is no alpha. Well. There’s a 1% chance of delivering alpha.

If you had a 1% chance of success at something, would you do it?  You might gamble on it. Place a bet on Red 34 because you’re prepared to lose it. And hey, you never know.

And you lose. The odds of winning are…well. One percent.

The secret to success is having at least a 51% chance of success. Because doing something over and over at which you have a 51% chance to succeed virtually guarantees some measure of success. The odds dictate it.

A 99% chance of success is the proverbial no-brainer. This is why Blackrock, Vanguard and State Street win. They have a 99% chance of success. All they have to deliver is beta – which is the market.

There’s no chance of failing!  Well, technically, you might beat the market, but that’s not the objective of money wanting to BE the market, be beta.

That’s why ETFs are cheap. There is a 99% chance that ETFs will deliver the performance they’re intended to.  But they won’t deliver alpha. You can buy an S&P 500 ETF with a 99% chance of success at delivering beta for six cents on the dollar.

Do you see where I’m going and why I’m beating this dead horse to death?

IR departments, c-suites, Boards have wholly unrealistic expectations. You cannot be better than everyone else. One percent of you can.  But 99% can’t.

So why not stack the odds in your favor? If you’ve got a catalyst, if you’re Nvidia or Tesla or Meta or Apple, or Enphase, or Quanta Field Services, or Chipotle Mexican Grill or Old Dominion Freight, then by all means deliver alpha!

Most aren’t.

In the past five years, the S&P 500 is up about 54%. Back out inflation and taxes and commissions and it’s about 5% a year. And how many stocks are up more than 54%? Less than the number down that much.

Instead of trying vainly to put in your earnings releases what you hope against hope will give you alpha, you should put in it instead what delivers beta. Because you WILL succeed.

Do you want to fail? Or succeed?

If you are a large cap value stock, say that.  Stop saying whether you did this or that. Just put a table out that’s not in a feed. Smart people can read it and understand what you did or did not do.

But that’s not what determines your value. The great bulk of investment dollars now – 70% of them – are buying your characteristics. Say, a large cap value stock. Not your quarterly results.

Yes, machines and hedge funds gamble on those. Give them less to bet on.

You are a product 99% of the time. Some part of that time you’re an awesome arbitrage trade because you put out comparatives and statements machines and humans can gamble on.

Instead of telling the machines you’re beta. Just the market. Nothing to see here, move along.

If you don’t understand what I’m saying, ask me!  Drop me a note. Call me.  This is the future for public companies, for IR professionals. Promoting beta.

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