Last Updated on November 21, 2020 by Oddmund Groette
Many day traders are thrillseekers. Too bad, because I think the best stocks are those that are most boring. I haven’t really thought much about it until this fall, but after starting reading a lot of academic papers I have realized the following: I basically only daytrade stocks that have a low beta/low volatility. If I take the average beta for the whole stock market, I trade more or less only stocks that are in the lower half in terms of beta. Also, I trade none of the “hot” stocks like FB, AAPL, GOOG, BIDU etc. Actually, after 10 years of daytrading and 175 million shares traded I still haven’t traded one single share in those stocks! And I have traded more than 3000 different tickers so far.I did try LNKD but lost more in just a few trades than I did in dozens of others. Not my cup of tea.
This gravitation towards low beta stocks is not intentional. It’s just a result of all my research. My thinking and my take on the stock market simply fits better to those stocks. Risk-adjusted return improves a lot the less volatile the stock is. One of my key parameters is looking at each stock’s max loss vs. max win. I prefer stocks in each strategy that has on average bigger winners than average bigger losers no matter what win rate etc. Bear in mind I never use a stop-loss. I only use time stops.
Actually, looking at my stocks I can say the following: The more dull and boring the stock is, the better! Southern Company (SO) has been one of the best stocks over this 10 year period. Can you imagine a more boring stock? My other favorites are KO, PG and JNJ. Previously I also made good money in KFT, but that one is split in two companies now. This is not the typical daytrading stocks mentioned on message boards etc.
But why? IMO, high beta stocks are more difficult to trade because they give bigger losses. That shouldn’t be a problem as long as the profits are bigger, but human nature tends to ride losers and cut winners. I’m prone to that, and I guess low volatility stocks minimizes that (for me). Risk-adjusted return improves a lot the less volatile the stock is.
I came across an interesting article from PIMCO, the world’s biggest bond holder. They argue the same as me, but they only consider a much longer timeframe than me.