Take a more careful look at what is going on
Price "noise" in the marketplace may be more important to investing success than is generally accepted. See how the 50 stocks and ETFs with the largest number of Seeking Alpha followers are impacted:
Sorry about the dose of data, but these are the 50 most followed equity securities on Seeking Alpha. They are, for Seeking Alpha readers and contributors, the most pertinent illustrations of the topic of discussion.
The relevance of these stocks to time is often overlooked, particularly by many media, which seem to be price-concerned only with now, or perhaps yesterday, from which to show changes to now. The presence of a tomorrow is recognized, but getting specific about which tomorrow might incite some lawyer to make trouble, so "let's not make forecasts" seems to be the media rule.
For those of us in the investing trenches of either making and/or consuming forecasts, the element of time is crucial. It is what paces the progress (or lack of it) of our choices. And because "the time value of money" is recognized as the appropriate compounding scale, and CAGR (compound annual growth rate) is its product, comparisons of investing progress are, and should be, measured that way.
Figure 1 sidesteps compounding complexities by keeping most of its data in annual (one-year or 52-week) terms. The point of the table is emphasized by its blue column, the bottom-to-top measure of each security's price range, in percentages of the year's top price above its bottom price. That is what the table's securities are ranked by, in ascending order.
Some horrible experiences at the bottom of the list generate huge range-size numbers because the low price figures are so small, compared to where they once were within the past year.
The column to the left of the blues tells where today's price is in relation to the security's entire price range for the year. Its Range Index [RI] value is what percentage of the range is between today's price and the low price in the past 52 weeks. For example, TWTR with a price today of almost $15 is close to its low of below $14, showing a past-year RI of 4.
That 4 is the downside part of the year's range, whose high of nearly $39 is +188% above the low.
Question: What to do if you still (or might now want to) own (NYSE:TWTR)? A lot depends on what may happen next (in the passage of time) to its price. To get some street ideas, we looked at the analyst notions reported in Yahoo Finance as possible EPS annual growth rates expected in the coming 5 years. They are reported in the column to the right of the blue numbers. TWTR scores an enthusiastic +45% per year.
The next column to the right divides the past year's range size by the growth rate "hopes" to see how long it might take, in years, to duplicate a price gain the size of the price range just seen. For Twitter, Inc, it is only about 4 years.
Now of course it makes a whale of a difference as to how these numbers come about in the case of other securities. At another extreme, check Amazon.com, Inc (NASDAQ:AMZN), half a dozen lines above TWTR. AMZN is near the top [RI of 97] of its 72% range size, and has an even more enthusiastic street outlook than TWTR, of +55% per year.
So if the next 52 weeks are a repeat of the past 52, in a year and four months (72% divided by 55%= 1 1/3 rd years, or by September 2017) we might see an AMZN price of over $1,225.
You and I (and others) may have disparate ideas. And among these top-interest 50 stocks there is great diversity of experiences -- and prospects. The average range size is a high price +90% larger than its low. But that average includes some huge triple-digit ones, and more than 6 out of every 7 are smaller than that 90% average.
Likewise the growth hopes column contains some red negative hopes (by shorts?) that will skew the growth average. So while dividing 90 by 8 gets 11+, probably the row-by-row-calculations average of 5 years is a better one.
So what good is this calculation?
As an investment selection guide, it's probably useless. But as an educational tool, I hope it opens minds for another way to look at what is going on in the market.
Can you think of this as a measure of how many multiples of trend growths occur in a typical year's range of market prices? Should 5 times growth = 1 year's price noise?
Please don't hurry past this question if you don't understand its point.
Excluding the red negatives rows, in the column of "Range in Growth Yrs," how many instances do you find of less than 1.0. Any?
There aren't any. Meaning that in these stocks of interest, in a typical year all of those stocks' prices range over multiples -- not fractions -- of their trend growth. This year is no different from prior years. And this year, for these 50 stocks, prices moved 5.0 times their trendline hopes.
So what has happened to all of that price change in excess of what may be justified as trendline growth? Where did it go?
For many it went down, in the form of declines, with prices waiting at lower levels to regroup for above-trend recovery in the next year. Blather, rinse, repeat.
Key word in the above paragraph is waiting, which is to say consuming time, as well as capital, that might have been liberated for further use except when held captive in a buy-and-hold strategy. Here is the money value of time, being lost, discarded by a strategy of buy and hold.
So, how to take advantage?
Today's equity markets are hugely different in their functioning than those of the 20th century. The "cost" of accomplishing transactions, thanks to advances in information technology, is less than the value of having control over their presence. So "investment banking" firms' brokerage operations will actually pay volume traders for their business.
In the 20th century, "Cadillac" brokers got $50-$75 commissions for the simplest of trades, hundreds for others. Today their base price is $7.95 and their competition does it for $1 a trade. If you pay $1 to commit only $1,000 to an investment, it can be done 5 times (in and out) before it eats up 1% of a gain on the $1,000.
When normal market uncertainty generates price ranges (in one year) in good investment securities of 3 to 4 times what the best possible, perfectly-timed price change in SPY could produce, it's time to rethink "long-term investing in the stock market" being done with a buy-and-hold "strategy."
Investors can magnify their buy-and-hold returns by watching where the stocks in their portfolio are in range index terms of the past year. When they get up to 95-100, they may best be used as sources to add to the ones now down in the 5 to 10 range-index area, or to find other new and promising issues with similar low RIs.
Horrors! Think of the taxes to be paid.
Yes, think of the after-tax capital remaining from a +50% gain, net of the highest ordinary income tax likely, compared to the typical single-digit growth and dividend returns from buy and hold, even before the taxes get ultimately paid.
And then recognize that after-tax capital might get compounded more than just once in a year; or the trades might get done in a tax-sheltered account.
Additional disclosure: Peter Way and generations of the Way Family are long-term providers of perspective information (earlier: 20th century) helping professional and (now: 21st century) individual investors discriminate between wealth-building opportunities in individual stocks and ETFs. We do not manage money for others outside of the family but do provide pro bono consulting for a limited number of not-for-profit organizations. We firmly believe investors need to maintain skin in their game by actively initiating commitment choices of capital and time investments in their personal portfolios. So our information presents for their guidance what the arguably best-informed professional investors, through their own self-protective hedging actions, believe is most likely to happen to the prices of specific issues in coming weeks and months. Evidences of how such prior forecasts have worked out are routinely provided. Our website, blockdesk.com has further information.
Disclosure: I/we 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.