And have the least interim drawdowns in the process?
That's what wealth-builders really want/need to know. All the other stuff, about product development, competitive strategies, market shares, technology advancement, cash flows, underlying demand growth, productive capacity utilization, investor relations, regulatory influences, yada,yada,yada - it's all essential, and somebody has to know it.
Somebody does. Suppose you had access to the best investment researchers, best traders, best competitive intelligence pros (maybe you didn't know there's a whole professional society dedicated to that sort of thing?) and they could and would communicate with you on a day by day basis after the market's close (in NYC).
What should you want to know from them to answer this article's headline questions?
- How big a price rise is possible?
- How likely is it to happen?
- How soon can it happen?
- What can go wrong that can't be avoided?
Last night such a team told us that out of over 3200 stocks and ETFs that they know something about, they could identify over 2500 that they had reasonable enough current feedback on to make some guesses. But to have much confidence in what they know they would really want more background intelligence than they have, like at least 3 years of history.
So out of the 2500+ that leaves 1500+. Now within them, there are a lot of possibles they don't know enough about. They need more examples of what might happen under conditions like what is being seen today for many of the 1500. Excluding those, there are now still almost 1400.
Time now to find out which ones the team can identify as promising with some sense of reliability. Let's have them pick sell targets that are as high as they think each stock or ETF of the almost 1400 can go in the near future, and do it the same way they have over the past at least 3+ years. And also tell us how low those issues might go now, as they have opined in the past.
Then let's find out how many of the near-1400, when viewed as they are now, either reached their sell targets, or were at a profit 3 months later. We want to see which ones they were "right" about at least 7 times out of every 8.
That really narrows it down, but that's what is needed: 1400 become only 150+. Still, that's too many to choose from. Why don't we try to be more sure of their present upside targets. If the upside seen now is larger than what they have seen on average in past similar forecasts, the promise starts to lose credibility. By accepting only those with past price gain objectives at least as big as expected now we cut the 150+ back by almost half, to around 80+.
Okay, now we have a good core of prospects that have demonstrated reliably forecasted profit results that appear credible. Now, what kind of chances are we taking by putting our capital at risk to earn these payoffs? Let's see what the worst experiences were encountered by each during the past times they earned their profit.
By relating how their upside promises at present compare, in the periods it took to gain the profits, with those experienced maximum price drawdowns from cost, we have a scale of the reward-to-risk balances that can be our final screen.
If we were to accept candidates that had as much past risk as present offered reward, the number continues to be unwieldy, over 50. We need to tighten it up to where we have only about a dozen or so prospects to choose from. That turns out now to be where the rewards expected are twice what the capital risk exposures have been in the past.
Here's the actual equities that survived this sifting process today, January 8, 2014:
The forecast team has handed us 16 candidates, 13 stocks and 3 ETFs. On average they promise +8.2% future gains assured by +9.1% parallel experiences. The +8.2 prospect average is 2.7 times their past encountered risks of -3.3%.
And it turns out that this group of candidates put together their achievements on average in holding periods of only 35 market days, or some 7 weeks. That could be compounded about 7 times in a year, at an 87% annual rate. The same set of potentials seen by this team for the DJIA 30 industrials via the DIA ETF offers the less attractive parallel in the line below the 16 Best Choices averages. It is followed by their outlook for SPY at this date, along with its past record.
We present the 16 candidates rather than one "Best" choice, because many good reasons lead investors to preferences that differ among individuals. And that is part of what makes markets work well. Our posture is that there are ways to separate the good grains from the chaff, and it appears that many investors spend far too much of their precious time lost in the haystack.
Among the 16 in the table above we have boldface-highlighted the candidate's score that is most favorable in each column, all other things being equal. For example the +13.9% upside of Air Methods (NASDAQ:AIRM) is larger than any other, while the -0.7% maximum drawdown of the DJ US Healthcare iShares (NYSEARCA:IYH) is smaller than any of the others. But so is IYH's upside smaller.
Thus enters the complexity of this scoring system, a characteristic of any investment decision process. What is the investor really after, and what will he/she put up with to get it? If the objective is risk avoidance, IYH's past experiences, when our intelligence team's prior appraisals have been like now, (that 70% of the likely near future price range is to the downside), no worries, mon, because all (100 out of each 100, or actually 60 out of 60) prior experiences done this way have been profitable. And their current prospect of nearly a +2% gain is reassured by the average of previous +2% wins every time. No guarantees, of course, but good encouragement.
The IYH payoff in only 12-day holding periods provides an annual rate of +50% when compounded some 20+ times a year (of 252 market days). Some more aggressive and risk-tolerant investors might think the IYH route is expensive in terms of personal time and attention, just to feel really safe during the travel.
The next-most drawdown-exposed vehicle, also an ETF, the (2x) leveraged ProShares Industrials (NYSEARCA:UXI) is the same kind of large-potential-downside (a 71 Range Index, 71% of its forecast price range in that direction) but both the % payoff past experiences and the present prospect at around a 5% level appear to be as well assured (100/100), and have been achieved in only an average of 9 market days. That presents a best-in-the-group annual rate of +277% possible victory.
Great stuff to brag about at a next social gathering or among bridge, poker, or golf friends. But that bravado hides the fact that these short-term kind of scalps require pretty constant attention and can undermine diligence in the day job, or distract concentration on the golf course. See, everyone has his/her tradeoffs.
So, maybe something like the FTSE/Xinhua China 25 ETF (NYSEARCA:FXI) could strike a better balance. Its history from prior Range Indexes like today's have all been profitable (still no guarantees) and its average holding period to fruition of 34 market days suggests a reinvestment need of only about 8 times in a year. Its larger average past payoffs still offers a triple-digit annual rate of gain, making the extra effort compared to some buy-and-hold approach worthwhile.
In such comparisons, the SPDR Dow Jones Industrials Trust (NYSEARCA:DIA) and the grand-daddy of ETFs, the original S&P 500 Index SPYDR (NYSEARCA:SPY), both show in their Range Indexes that big-money-funds apparently at present regard the markets as near dead-center in their upside vs. downside contemplations. This contrasts with the 16 group which has an average of about twice as much upside as down, and contains several with balances of 4-5 times as much upside as down. A couple such candidates as described above, are seen to have more than twice as much downside, but seem to offer momentum plays on their way to forecast-range-top targets.
These are among the advantages offered by avoiding the investment herd's conventional "conservative (sucker) long-term, buy and hold and forget" advised approach, while paying fees for "management" that shows little to no productivity.
Are you wondering where we get the "intelligence team" providing all these specific price range prospect insights? We simply conscript their conclusions from the people and systems resources of the market-makers, as they undertake the hedges necessary to protect their at-risk capital while practicing the arts that continually enrich them at the expense of the investing public.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.