Forum Archive Index - May 2004

["tennyson@caverock.net.nz" <tennyson@caverock.net.nz>]

Hi Dean,
 
>
>Still, in hindsight 
>any historical figure used for future prediction  - the past may be
>nothing like the future.  Interestingly Snoopy when I looked further
>there are a number of different figures for beta for WRI depending on
>the source of the information, so perhaps to be on the safe side I
>should have calculated my own as well.
> 

I have appreciation of what 'beta' is trying to do.  That is adjust for the 
return chacteristics of an individual share relative to the market.  
However, I have severe doubts as to whether 'beta' actually achieves 
this.

The basic presumption is that 'the market' has a 'beta' of 1, and that 
any share with  a 'beta' of less than one is less 'risky' than the market, 
whereas any share with a 'beta' of more than one is more 'risky' than 
the market.  The more volatile a share is the higher 'beta' it has.

The problem I see with this is that the 'risk' of  investing in a share as 
measured by beta is not affected by the prevailing share price, or 
business fundamentals.   Put in the context of WRI, what 'beta' is 
telling you is that the risk of investing in WRI at $1.40 is exactly the 
same as the risk of investing in WRI at $1.00.   Clearly those investors 
who buy into WRI today at $1.40 are taking a far greater risk than 
those that bought in at $1 in 2003.    So any 'risk measure' based on 
volatility I believe has next to no value to investors.

Sure making an adjustment to the market premium required on 
individual share investments relative to the market is a good idea.
But 'beta' doesn't do that as I see it.

SNOOPY

PS  For WRI I would argue that a suitable coefficient to replace 'beta' , 
which I shall call 'better', should be based on 

1/ normalised earnings yield 
2/ the ability to pay back long term debt and 
3/ consistancy of profitability 

Such a coefficient would be much more useful indicator of risk.   
Without going into a formal calculation I would rate WRI as being 
excellent on points 1 and 2 and fair on point 3 leading to an overall 
'better' coefficient of 0.3

Rerunning the share valuation DDM model using a 'better' of 0.3 
gives

WRI Equity WAC = 5.87%+ (0.3)(8.35% - 5.87%)= 6.61%.

If I take this years core dividend of 2.5c + 6c= 8.5c as my starting 
point, then using the DDM model I get one WRI share to be worth:

= 8.5c/( 0.0661-0.0218 ) = $1.92

Any comments on that?





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