Berman’s Call 10th Anniversary: Assessing the Risk Before the Return

I have heard some say that I should change the name of the show to “Bear-man’s Call” because I’m too bearish all the time. On the 10th anniversary of the show, I wanted to clarify why some may have that perception. Simply, I consider the risk of an investment before I consider the return. The cost of investing is not about the $9.95 to make a trade or the management expense ratio (MER). Behavioural economics tells us that the biggest cost to investing is your ability to handle the ride. Managing your emotions when it’s not exactly working out as you had hoped. So before you buy your next investment, learning how to assess the risk and how to evaluate the prospects for return it might be a good exercise.

When viewers call in to the show, I have about 30 to 45 seconds to give an answer. Now think about that. I’m evaluating the company or ETF in a very short period of time. I’ve said for years that I’m more of a MACRO analyst. What that means is I look at the BIG PICTURE more than I look at the small picture. The reason I do that is that I know each stock/sector/country has a beta relative to the overall market. Beta is the sensitivity to the market overall. A stock with a beta of near 1 basically moves in tandem with the market overall on about a 1 to 1 basis. Buying a position like this gives almost no diversification benefits compared to holding the overall index ETF.

When investing globally, my benchmark is often the world index. I like the Vanguard All Cap All Country ETF as it basically captures the entire world of equities. So the first thing I do when evaluating a potential position is determine what the beta (risk) is compared to the world index. I have software to help me do that. You can do that at home by putting the daily or weekly returns of the world index in a spreadsheet and compare them to the returns of the stock or ETF you are analyzing. You can use the regression formula = Slope (a:a,b:b) with the returns of the index (VT) in A and the target asset in B. You’ll want to look at a minimum of two years-worth of returns for it to be statistically meaningful. This will give you an idea how sensitive your stock is to the world index. A reading near 1 generally means you are not getting much diversification.

As a rule of thumb, that means it’s far more important to consider macro/sector risks that company specific risks. For most stocks, about 50 per cent of their movement are defined by macro market factors. About 30 per cent is from the sector specific risks and only 20 per cent on company specific risks. Those percentages change based on the beta of the stock. For example, the graphic below shows ZEB.T (equal weight Canadian Banks) compared to the world index. The beta is about 65 per cent, which means it is correlated positively with the world market, but not highly. That means what Canadian bank stocks do are more a sector and stock factor than a world market factor. With a beta of 65 per cent, about 30 per cent is market risk and closer to 50 per cent sector risk.

So then you know that you need to focus more on the yield curve and domestic Canadian economy over global risks.

When we look at the XEG.T (TSX Energy Sector) compared to the world index we see a beta of about 1.16 over the past few years. A beta higher than 1 means it’s riskier than the overall market. In the case of energy stocks, the world market tends to be a big influence. Of course, their revenue sources, the price of oil and gas are huge influencers too, which of course are very sensitive to the macro world economy rather than company specific issues.

Digging further down, we can see the beta of a key stock like Suncor (SU.TO 1.00%), the largest stock in the sector, has a beta of only 76 per cent, which means there are more company-specific issues compared to the sector overall. In the case of Suncor, about half their revenue comes from refining and marketing. That is, taking the crude products, refining them and selling them. Income is far more stable in the refining and selling of product at the pump than prospecting for it.

A company like Crescent Point (CPG) has a beta of 137 per cent. A deeper dive confirms that 100 per cent of their revenue comes from exploration and development, a far riskier proposition than refining and marketing. Therefore, you need to focus more on what oil and gas prices do than company specific risks.

Hopefully that gives you a little more insight into how I look at stocks, sectors, and ETFs from a risk management standpoint. On the return side, I’m a value investor at my core. The energy sector has been underperforming for a while and the risk relative to the return is now getting attractive again. A few months back when most were bullish on the rebalancing of the sector in terms of supply and demand, the risk factors were simply too high. While the sector is not as cheap as it was last year, relative to the world market (VT), it’s attractive.

Watch this article in a video segment online at

Buy low, sell high and learn how to prosper. Tactical investing is an important skill when managing your own portfolios. Learn how to use techniques like this to evaluate risk and return in how to be a smarter investor in our 7th season across Canada speaking tour. Free registration at Help us raise money to fight Cancer and Alzheimer’s by making a voluntary donation with your registration. Over the past few years, Berman’s Call roadshows have raised over $230,000 for charity thanks to BNN viewers, our sponsors, and our partners.

Share your thoughts and comments