Delivering Beta
On August 31, Dollar General (DG) plunged 12% on earnings. The company used the word “decreased” three times in the six bulleted highlights atop its release. Why do that?
It’s irrational for stocks to plunge that much. It’s irrational for well-informed money in this era of ubiquitous data to not know what companies are likely to report. And it’s irrational for public companies to be releasing information in ways that destroy 12% of shareholder value in a day. Because you don’t need to do that.
True, you can’t control what machines do. And machines, models, and derivatives are the demolishers of value, the creators of volatility. In fact, stock-picking was just 7.8% of volume August 31 in DG trading, down 21% from August 30.
Stock-pickers didn’t sell. Who did? Passive flows rose 23% as ETF baskets dumped DG to shed its volatility-fed tracking errors. Shorting rose 37% in a day. Short derivatives bets were up 29%. Machines caused the drop.
Don’t do what DG did. Do you know what information is on feeds, machine-readable? You should. Reduce the data that’s machine-readable. You are not obligated to feed arbitragers value-destroying comparatives.
Which brings me to beta. I’ve written about it a lot lately on the ModernIR blog. Beta isn’t volatility but the performance of the market. Alpha is beating the market while doing what the market is doing.
It’s nearly impossible. About one percent of stocks consistently outperform the market – deliver “alpha,” or returns that exceed the risk undertaken to produce them. Yet, every investor relations department, every CEO and CFO is expected to deliver alpha. It’s such a herd pursuit on Wall Street that CNBC has a conference called Delivering Alpha. Except there’s a 1% chance of delivering alpha.
The secret to success is having at least a 51% chance of winning. Because doing something over and over at which you have a 51% chance to succeed virtually guarantees some measure of success. The odds dictate it.
A 99% chance of success is the proverbial no-brainer. This is why Blackrock, Vanguard, and State Street win. They need only deliver beta–market performance. Ninety-nine percent chance of success.
IR departments, C-suites, and Boards have unrealistic expectations. You cannot be better than everyone else. One percent of you can.
So why not stack the odds in your favor? If you’ve got a catalyst, if you’re Nvidia or Tesla or Meta or Apple, or Enphase, or Quanta Field Services, or Chipotle Mexican Grill or Old Dominion Freight, then by all means deliver alpha!
Otherwise, deliver beta. If you are a large cap value stock, say that. Stop saying something decreased. Put that in a table that’s not in a feed. Smart people can read it and understand what you did or did not do.
The bulk of investment dollars now – 70% of them – are buying your characteristics – say, a large cap value stock. Not your quarterly results. Yes, machines and hedge funds gamble on those. Give them less to bet on.
You are a product 99% of the time. So, tell the machines you’re beta. Just the market. Nothing to see here, move along.
The job of IR isn’t delivering alpha. It’s promoting beta.