Most investors understand the concept of Beta, but do not appreciate that all Betas are not created equal. We'll start with a little Beta primer. Let's say you have two stocks, Huntington Banc (HBAN) and Invesco (IVZ), which both have a Beta of approximately 2. If the market moves 1% you would expect HBAN and IVZ to move 2%. Investors that are trying to dampen market sensitivity may Beta adjust by multiplying the actual position size (for example we'll say 3% current positions for both HBAN and IVZ) by the Beta to get a Beta adjusted position size of 6%. Here is the issue, investors assume 6% position size for both assets to make portfolio management decisions, but only about 50% of the movement of HBAN is explained by its Beta (measured by correlation), while over 80% of IVZs change is explained by market movement. They are simply not the same and should not be treated as such.
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After reading Jeremy Grantham of GMO’s most recent letters, I see that there are several attributes of Mr. Grantham that I admire and think are common amongst other great investors:
1. Willingness to say “I don’t know.” Jeremy Grantham has great insight on a vast amount of financial market topics, but he is quick to say, “I don’t know”, when the certainty of his conclusions are low. Great investors all readily admit their own limitations. Certainly, they know a lot, but they are very aware of what they do not know as well. (Quote from Grantham letter - "As for commodities, who knows? There were a few months where they looked like a high-confidence short, but now they are half-price or less, and are much lower confidence bets. In currencies, we know even less. It is easy to find currencies to dislike, and hard to find ones to like. There are no high-confidence bets, in our opinion.")
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