Tuesday, August 09, 2005
Beta vs. Buffett: Round 2
An old equity research piece from CSFB analyzes the usefulness of Beta vs. Margin of Safety. The conclusion they reach is not all that earth shattering: beta is a useful measure of riskiness over the short term, and probably is not over the longer term. I think Buffett would agree with that, and may even have said as much.
What is interesting is that they run the numbers on Buffett's go-to Washington Post example (ie. Washington Post stock got hammered, the beta went up (suggesting the stock was more risky) the actual value of the company remained the same, so the stock was actually less risky). They find that Washinton Post's beta actually decreased during that time period. Doesn't really change the usefulness or validity of Buffett's argument, but interesting read nonetheless.
What is interesting is that they run the numbers on Buffett's go-to Washington Post example (ie. Washington Post stock got hammered, the beta went up (suggesting the stock was more risky) the actual value of the company remained the same, so the stock was actually less risky). They find that Washinton Post's beta actually decreased during that time period. Doesn't really change the usefulness or validity of Buffett's argument, but interesting read nonetheless.
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What isn't noted here is that Maboussin (sp?), the author of the piece, has since gone on to Legg Mason to work with Bill Miller and team. He continues to write gripping stuff, just under the Legg Mason headline.
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