What Part Of Stock Price Volatility Don’t You Like?
Summary If you already have more capital than you want or can tolerate, better to spend your time on some other informative article. If you need protection from excitement, mental stimulation, dynamic surroundings, or changing attention demands, reading this may not be a good prescription. Do you have unreal expectations about gaining above average investment results from only average or below average efforts? Caution! Disturbing notions may be coming at you from herein. The troubling truth about investing is that price volatility is essential to good wealth building and to superior investment productivity from capital. But it takes effort and discipline. Volatility is not risk. It must be sought out to find the best risk~return tradeoff circumstances. Not fearfully avoided, thus rejecting outstanding performance opportunity. No spring flowers without the rain So carry an umbrella. Like the pro investors do. Or watch them as they put volatility to work for themselves, and let them do the hardest part of the work for you. That’s right; the price decline part of volatility is what most investors want to avoid. Yet what they (and we) want is to enjoy the thrilling recovery periods. That part of the long-term price trend that is greater than the trend. But the declines can’t be avoided if you just buy and hold. Declines are built into the trend. So don’t be a passive, trend-line, buy and holder. Avoid the declines. Buy and holders are right. Making that decision means buying and SELLING! Well, they’re only partly right. It means buying and selling and BUYING – to sell again, repeating the process endlessly. It is called active investing and takes effort, and discipline, and usually, guidance, since most of us don’t have the experience, intuition, and information inputs needed to do it well by ourselves. What does “doing it well” mean? Is it not making mistakes? No, you have to accept the reality that investors all will make mistakes. It’s just that active investors make mistakes of commission, while passive buy and holders make mistakes of omission. Doing it well means your odds of making a profit in any given period of time is exemplary. Good may be 55-60% of the time, and 35-40% of the price moves. Well can be 80-90% of the time, and a similar amount of the price involvements. What are the potentials in active investing? Most stocks have price growth trends that average 25-35% of their price travels in a year. So most stock prices travel 3 to 4 times as much as they grow. Here’s an example: Apple, Inc. (NASDAQ: AAPL ). Its price range in the past year has been $84 to $135, but it presently is $125. So its price travel has been +61% up and -9% down or a total of 70%. Yet its 5-year average price trend is +27%, a little better than 1/3rd of the travel. And AAPL is the stock most investors look up to. Another buy and hold portfolio stalwart is Johnson & Johnson (NYSE: JNJ ). Its travel in the past 52 weeks is from $95 to $109 and is now $100, or +15% and -9% or 24% traveled. Its 5 year price growth trend is 9%, again a little better than 1/3rd of its travel. Put another way, their prices travel nearly 3 times as much in a year as the stock’s usual growth in value. And these are good examples. How about a horrible one, Exxon Mobil (NYSE: XOM )? It has gone from a low of $83 to a high of $105 and is now at $87. The travel is +27% up and -20% down, or 47% and its 5-year annual growth trend is 6%. Travel nearly 8 times trend. The key to active investing is to avoid the times when stocks are declining. It can’t be done perfectly, and to maintain a profit pace it can only be done by being invested sequentially in a series of different stocks, mostly in ones that are not going down during the period of investment. Doing it perfectly means having win odds of 100 out of 100 positions. Doing it well means having odds of 80 or better out of 100. The best hedge funds typically average 65-70. buy and hold as a strategy, in terms of time invested, averages only 25-35 win odds. But where can such odds be obtained? Help exists among a sizable community of investment professionals that constantly achieve win odds of 90-99 in the positions they take. They are the market-making community, the experienced, skilled, shrewd arbitrageurs that regularly hedge the risk exposures they must take in order to help big-money-funds make volume adjustments to their investment portfolios. Records required by government reveal that many of these “investment banks” go for several weeks and months at a time without a trading day that loses money. They know how to keep their capital safe because their world-wide information-gathering systems, extensive analytical staffs, and instantaneous communications resources keep them at least as well informed as their institutional clients. Their objective is to be better informed, and apparently they often are. They don’t want or intend to help you, but doing their very profitable everyday jobs at the scale that is required forces them to leave tracks in the market mud that reveal their expectations. We know how to translate their actions into explicit security price range terms. We have been doing it daily since the turn of Y2K. Now we are updating their implied forecasts on over 2,500 stocks, ETFs, and indexes. Some 3 million forecasts in the past 5 years alone, a valuable historical perspective when teamed with actual subsequent market price changes. What evidence exists of their guidance value In the first third of this year, daily ranked lists of stocks and ETFs priced at favorable upside-to-downside change prospects have named in advance 1290 securities identified in our top 20 lists. Of these, 499 have reached pre-specified closeout targets, averaging +5% gains. The average holding period of the 499 is about 49 calendar days, resulting in an annual gain rate of +43%. This is an average measure of individual security performances, not of the performance of any specific portfolio. These results contain holding-period time-forced closeouts under our standard TERMD portfolio management discipline. Of the 499, 402 closed at a profit, so the win rate is over 80%. The remaining nearly 800 listings when marked to market average a small gain, so overall the 1290 are at an average annual rate of gain of +25%, about 6 times that of SPY since the start of 2015. No guarantees or promises here, just perspective. Recently a Seeking Alpha article provided a disclaimer paragraph that was necessary to its article. It was comprehensive and thorough regarding the reporting of investment performances, so I will repeat it here. Hypothetical performance results have many inherent limitations, some of which are described below. No representation is being made that any account will or is likely to achieve profits or losses similar to those shown; in fact, there are frequently sharp differences between hypothetical performance results and the actual results subsequently achieved by any particular trading program. One of the limitations of hypothetical performance results is that they are generally prepared with the benefit of hindsight. In addition, hypothetical trading does not involve financial risk, and no hypothetical trading record can completely account for the impact of financial risk of actual trading. For example, the ability to withstand losses or to adhere to a particular trading program in spite of trading losses are material points which can also adversely affect actual trading results. There are numerous other factors related to the markets in general or to the implementation of any specific trading program which cannot be fully accounted for in the preparation of hypothetical performance results and all which can adversely affect trading results. All of our results quoted above are actual, not hypothetical, measured in real time from published forecasts with actual available end of day market quote entry costs and closeouts. They are not the product of any “back-test” and have the live involvement of hundreds of “list” subscribers. Investor/readers who have no computer programming skills and/or experience frequently have little understanding of how easy it is to mass-produce an array of “back-test” portfolios and then display selected good results implying that the results might be replicated in real time. Or were. The process is called “data mining” and is disreputable because it rarely provides effective results in real time, and has no logical reason to function in what may be a totally different future operating time environment. Unfortunately, disclaimers written in italics or tiny print at the end of long articles are often passed over, unread, even though they may fess up to the fatal flaws that have been embedded. Unread, particularly on Seeking Alpha because readers value and speed to the comments section following the article, where outside qualitative analysis of the article may be revealed. How were these equities selected? Over 3500 securities irregularly provide data on the hedging activities of MMs, but some 2500-2600 are typically available on any given day. To be included in the selection process, investment candidates had to have at least 3 years of prior daily forecasts, and have at least +8% of upside price change potential. No lazies need apply. The candidates are further compared based on how the real world of market prices following prior forecasts like those being made now. Since the forecasts being evaluated are genuine look-ahead-in-time statements of the period, testing them this way is really “forward-testing”, not back-testing current day hypotheses made after the fact, to see if they might have worked. We have the real results of what did work, what didn’t, and how well or how badly. What links those past real results to possible future ones is the similarity of today’s forecast balance between upside and downside prospects to those seen in prior times. No doubt what may have been anticipated in earlier days will not work out now exactly as it did then. But with adequate sample sizes (our top 20 lists usually average over 100, and are rarely less than 50 individually) a fairly good focus can be obtained as to what is likely to happen. Those probable parameters of size of payoffs and odds of achieving profitability are traded off against the emotional stress risks of worst-case price drawdowns, the actual experiences subsequent to prior similar forecasts. The win-loss odds of actual experience weight the payoffs and possible penalties (whether realized or not) in ranking the desirability of each candidate’s inclusion in the top 20. All of the evaluations are held to strict maximum holding period time limits. That forces a realistic recognition of the value of time in the investing process, and contributes to the results achieved, where closeout gains can be compounded 7 or 8 times a year. When the odds for success are 80 or more out of 100, such compounding is powerful. But how much of it happens without volatility? Very little. Very few companies can grow earnings at 40% per year rates to support trend-line stock price growth at that rate. Yet when holding periods are prescribed with explicit sell targets and rigorously enforced time limits, and holding mobility is enhanced by ample numbers of experience-qualified investment prospects, the opportunities are greatly magnified over locked-in positions in a limited number of rarely-sold holdings. Price volatility is a resource that generates opportunities to participate in price recoveries traveling at well-above trend-line paces. To adopt an investing strategy that willfully avoids securities simply because they have price volatility denies much chance of producing enviable investment return results. When the identified opportunities are conditioned by the odds for success and the extent of possible failures, there exists a sound strategy to significantly outperform the conventional fear-driven investment practices. Conclusion Investors can’t make sensible risk~return trade-offs when they don’t know what risk actually is. Price volatility is not a proper measure of risk because it also includes abnormal gains. Statistical measures of volatility do not separate the good from the bad. It is little wonder that investment practices confusing the two can do no better than what is the usual single-digit per year percent result. The confusion encourages a fearful norm of not taking constructive actions, which guarantees a prevailing unsatisfactory outcome. Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.
