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Peter F. Way, CFA
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Peter Way Associates provides investment professionals and individual investors with forward-looking, market-derived Risk:Reward tradeoff assessments for widely held and actively traded common stocks and Exchange Traded Funds (ETFs). The firm maintains daily the odds of higher and lower next 3... More
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  • The Role Of TIME And Timing In Investing

    Our February 18, 2013 article pointed out the importance of TIME as an input to the investing process. This article seeks to consider how investors appear to think about timing as they go about making investment decisions.

    It's hard to find any investment timing discussions that contain illustrations that are not pictures (usually "charts") of the past. The implication is that past behaviors in market prices will tend to repeat, and somehow looking at the past will be productive.

    This approach is followed when the subject is either specific investment issues, or the overall market environment, usually as reflected in leading market indexes of stocks. It misses the most important, most significant point: We only have from now on.

    Our attention and efforts should be directed to the future, not the past, because investment markets persistently demonstrate that they do not repeat in the future in any reliable or demonstrable and credible way that can be used to gain investment advantage. Technical analysts, I'm sorry that may be a disturbing conclusion, but it is factually based from long experiences of many observers.

    Yet much timing contemplation is framed in calendar terms. How long did some action take in the past? When did the market or some issue see its price change direction? How long did a trend continue compared to what has most recently persisted?

    Life is full of mysteries. It's what keeps things interesting. But we each have only so many days in the undefined length of our lives to get done the things that are important to us. They shouldn't be wasted on futile activities, unless our particular state of mental health somehow considers that to be an entertainment that is not dangerous to others.

    The real work of investing comes in trying to identify those circumstances, driven by society, technology, physical nature, politics, human nature, or other causes, that are likely to produce desirable (and undesirable) changes in the perceived future value of specific investable vehicles. Both research and portfolio management (including strategy and tactics) are involved.

    Knowing what has happened in the past may help us frame the degree to which change in the future may occur, but it is only one of many judgmental inputs.

    The most demanding investment decisions are those of preferencing between alternative candidates for the commitment of both investment capital and investment TIME. Many purposes can exist that need satisfaction; often decisions must be either-or in nature. What trade-offs can be made to maximize one's overall investment objectives? Time often may well be a compelling motivator in the trade-off process.

    So instead of looking backwards at something that will not change, we should be looking forward at things that seem, in today's world, almost certain to continue to change. Productive investment timing is not a calendar-oriented activity, it is an alternatives-oriented activity. For me, this is a most important consideration in how long-term investment objectives are most likely to be achieved at least risk.

    It may seem simple to find a strong, viable enterprise that should carry our fortunes forward in time with their apparent essential then-current role, like buggy-whips or print copies of Kodak pictures. But decades later when little exists but pink-sheet ghosts of yesterday's dreams, and all that is left to retire on or send descendants to school on, the true meaning of risk descends on us. Not just in capital disappearance, but also in irretrievable time disappearance.

    Investing is hard work because it demands an active presence. Not just in making the decision today of what capital commitments to hold. But in making the strategic decision of how frequently to review those decisions to get the best out of their past foresights, in light of what can now be seen from today's contesting alternatives. Current views of what may be coming from those competitors requires continually refreshing what we used to know, in terms of what can be known now with current advances in many fields.

    We encourage investors to force those reviews by setting what used to be regarded as undesirably short time limits on when to require revaluations of investment holdings. Transaction technology advances and market trade competition makes this approach economically and operationally viable now. Capital commitments with a shorter-term discipline are quite different from trading on chance events. Their limits are not just calendar-related.

    Many professional investment organizations set rigorous portfolio "rebalancing" strategies, usually driven by the passage of time, calendar-quarterly, monthly, even weekly or daily. But that kind of mechanical attack on the problem denies a necessary patience ability to let the investment manager's foresight in earlier choices come to realization. This is an activity where an artistic ability often dominates among those who have the better records. Ideas need time to be able to hatch - but can't be allowed to be perpetually shielded from competitive reality.

    So we make our choices of what appears the most sensible (to us) trade-offs of risk and return in specific investment vehicles, and discipline those choices with target price gain limits and holding patience time limits. When either limit is reached, the competition for the right to represent capital and time in the next round begins anew. In this way, the process of "rebalancing" becomes a continual event, not a calendar-scheduled one. It is initiated importantly by defined successes (and failures), not simply by the passage of time.

    And the competition is disciplined by proven accomplishment or its lack, not merely by yesterday's hopes perpetuated by inertia and inaction, the hallmarks of the conventional excuse for investing of buy & hold & forget.

    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.

    Jan 06 4:55 AM | Link | 2 Comments
  • A Hundred Times Earnings! Is Your Generation Crazy?

    Sophomore: Gramps, you make investments, why would anyone intentionally pay over 100 times earnings for a stock?

    G: Uhh . . . to make money?

    S: But if most stocks sell at 10, 20, or 30 times earnings wouldn't this one ultimately have to lose most of your money?

    G: Yes, if it's P/E goes down that much before you sell it. Why should the P/E go down?

    S: Well, that's where most stocks are.

    G: So what keeps this one up where it is?

    S: Damn-if-I-know. What do you think?

    G: More buyers than sellers. Who owns it? Who keeps buying it? Does it trade actively?

    S: Well, over 3 million shares trade on an average day, at a price around $250. Yahoo Financial on the internet says corporate insiders own 20% of the company, mutual funds and institutions another 2/3rds and those 872 organizations own 84% of the float. What's "float"?

    G: That's stock not owned by insiders or affiliated companies, and presumed to be available for other investors to buy and sell. Perhaps you're looking at, Inc. (NASDAQ:AMZN)?

    S: Yeah, that's right, how did you know?

    G: Lucky guess. Well, if there is 3/4ths of a $billion on the table every trading day, it's probable your hundred shares, if you want to make a $25,000 bet, aren't likely to nudge the price very far. So let's look to the players that might move it.

    S: You mean those 872 funds?

    G: Those guys, the ones that have average commitments of $90-100 million in AMZN, or about 360,000 shares. How many of them could sell out completely in an average day's trading of 3 million shares?

    S: I figure only 8+ if no one else got to sell. That's about 1% of the big fund holders. So?

    G: So it would take 100+ days for them all to get out. That's five months of market days. From what I know about big money managers, exit liquidity times of five months are intolerable for any "active" investment. They didn't get control of all that capital by being stupid. They must be prepared to be "long-term, core-investment" holders in AMZN.

    S: Well they would have to believe that earnings per share could triple, just to get that multiple down to 33 times or at least quadruple to get it to a 25 times level. And that 100+ P/E is based on year-end 2013 EPS, estimated by 40 Wall Street analysts. Could they all be wrong by a factor of four? Only a year away?

    G: Probably not, since those analysts are survivors of one of the worst Wall Street employment cutbacks most of us old-timers can remember. But it might help to think about what kind of earnings growth beyond the next year could justify current prices. That's what a PEG ratio tries to do. The usual notion is that a P/E ratio equal to its annual rate of earnings growth is justified, even attractive, if they are about the same, given five years of that growth. A stock with a P/E of 12, growing at 12% a year would have a PEG ratio of 1.0.

    S: Doesn't that make Apple (NASDAQ:AAPL), with a 12 P/E and a +25% growth rate cheap?

    G: Maybe, but stay focused on your original problem. What kind of growth would it take to bring AMZN down to a reasonable PEG ratio? If a 25 P/E is the target, and it takes 4 times the E being used in the P/E, then (1+400%)^(1/5) -1 tells what is needed, or about 38% a year. The resulting PEG ratio of 25/38 = .65, just about where AAPL is now.

    S: Wow! Thirty-eight percent sounds like a lot, half again as much as AAPL. Can they do it?

    G: Some influential folks apparently think so, or the stock wouldn't be priced where it is.

    S: You mean those 872 funds? But what if they change their minds?

    G: Then there's trouble, T - R - O - U - B - L - E, right here in "River City." Remember that 5-month exit problem?

    S: How can I tell if they start to think differently? -- Or, instead, are remaining convinced?

    G: Well I have a friend who watches the market pros that help those funds adjust their portfolio holdings. They talk with the portfolio managers at many of the funds dozens of times a day. Often, in order to buy or sell in the million-dollar trades they need to make, the pros have to put their firm's capital at risk, in order to complete the "fill" of the fund client's order. With that dough on the table, the pros are very alert to changing client convictions.

    S: Will your friend tip you off if he sees trouble?

    G: Please use a different term - that word "tip" has some unpleasant legal connotations. And I don't even need to talk with my friend, because he publishes daily what the pros think their clients are likely to do with stock prices in the future. He learns that from the way the market pros protect the firm capital that they have to put at risk, stock by stock, day in and day out.

    S: Say, that's pretty neat. Are they getting worried about AMZN? What about AAPL?

    G: I subscribe to some of his services, and I can show you, because you're part of the family. But often my friend makes important information and ideas available for free on that internet investment site "Seeking Alpha." Here are the recent trends in what the market pros - and their big fund clients - are expecting for near-future price possibilities in each of those stocks. The vertical lines show the range of prices the pros are willing to pay for price insurance to protect their at-risk capital.

    (click to enlarge)

    (click to enlarge)

    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.

    Tags: AAPL, AMZN, long-ideas
    Oct 07 3:09 PM | Link | Comment!
  • Make Money While Having Fun At CEDAR FAIR (FUN)

    A favorite reacreational spot of legendary Fidelity portfolio manager, Peter Lynch, is Cedar Fair (NYSE:FUN). It happened to show up at the top of our daily list of odds-on, big annual-rate-of-return stocks today.

    In the spirit of the vacation season, here are the forecast particulars on this big Lake Erie entertainment park:

    Out of the last almost two years of daily evaluations, the pro market-makers have implied the current (+16% upside price change potential vs. -1/2% drawdown exposure) prospect 18 times before, or less than 4% of the time.

    The actual subsequent price experience by the stock in all these instances was an average gain of +22% and an average drawdown of -3% during the 3 months following each forecast.

    Using the top of the forecast range as a sell target provided average gains of 13.7%, with 17 out of the 18 experiences profitable, a win ratio of 94%.

    The average holding period for all 18 commitments was 17 days, which compounds to an annual rate of +600%. Such is the return leverage of Time-Efficient Investing.

    Peter Lynch may still know how to have FUN!

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Tags: FUN, long-ideas
    Jun 27 7:31 PM | Link | Comment!
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