One central tenet of modern portfolio theory is that investors should be rewarded by taking on more risk with above-average returns. However, that’s not always the case.
Seaver Wang, president and chief investment officer at registered investment adviser Karagosian Financial Services, tries to take advantage of what’s known as the low-volatility anomaly in stocks. Volatility is the tendency of a security or asset to fluctuate in price
Wang runs the new Low Beta portfolio on Covestor. In financial lingo, low-beta stocks are less volatile than the overall market, usually measured by the S&P 500 index.
In an interesting twist, academic research has documented how low-beta stocks have outperformed high-beta stocks over longer periods. This phenomenon flies in the face of traditional views on the relationship between risk and performance.
Several reasons have been put forth to explain the anomaly, including investor overconfidence and a preference for high-beta “lottery ticket” stocks. Investors pay up for high-beta stocks, which makes them overvalued and produce subpar returns going forward due to these behavioral biases.
Meanwhile, slow and steady low-beta stocks are often ignored by investors but churn out solid profits and performance. So, long-term investors can exploit the market’s inefficiency by buying and holding low-beta stocks.
Low Beta portfolio is designed to capitalize on this strategy, with Wang calling the shots.
The portfolio manager said he’s been interested in investing since high school, and after college he started his career at investment research firm Value Line before earning an MBA from Boston University. Wang, who considers Warren Buffett his investing idol, notes his experience researching small-cap companies has helped him dig into the nitty-gritty of businesses and balance sheets.
The portfolio manager starts by hunting for low-beta stocks, then runs fundamental screens looking for dividends and cheaper valuations. Low Beta portfolio typically holds between 10 and 25 stocks.
“My strategy is to minimize losses as much as possible,” Wang said. “In other words, we try to win by not losing.”
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Disclaimer: All investments involve risk and various investment strategies will not always be profitable. Past performance does not guarantee future results.