High Beta Stocks: Do They Offer Higher Returns?

High Beta Stocks: Do They Offer Higher Returns?
By Roger Nusbaum

SmartStops comment: This article points out that going after higher returns by taking on added risk is not necessarily a good idea. It also points out that the holding period for many “fad stocks” should be limited to only “a couple of years give or take.” We agree. Here is an alternative idea: In order to get higher returns you might occasionally consider taking on a few “fad stocks” with a high Beta and then use SmartStops to limit the risk. Now that sounds like the best of both worlds.

Excerpts: A high-beta stock is likely to have its day in the sun, but eventually it will start to rain. Pick any internet stock from the bubble. Chances are it gave ten years', or more, worth of appreciation from 1998-1999. The person who sold his net stock on Dec 31, 1999 and never went back had a different experience than someone who held on to internet stocks too long. This is true for every stock market fad. Success with the next fad will not come from holding forever; it will come from holding for a couple of years, give or take.
When I write about beta I use the word volatility, not risk. Increasing risk is really not something people want to do. They may want to increase volatility to capture a general rise in the market, but there is never a good time to absorb an 80% hit to one of your stocks.

Link to article: