First, let's define how we measure
Everyone's needs and ambitions are bound to be different. But all investors will have target goals that have milestone deadlines. Ones which can be appraised in terms of available capital to meet requirements, either from accumulation or by ongoing current generation.
The discipline that cannot be ignored is TIME.
Each milestone is anchored by time, even if not precisely. So the measurement of progress toward those milestones needs to be done in terms of RATE of progress.
Investing income is measured as yield on capital, per time period of declaration, often converted into annual rates. Capital growth is usually measured in value changes per year, often averaged over multi-year periods, at Compound Annual Growth Rates [CAGR].
Let's look at what Exxon-Mobil (NYSE:XOM) has delivered over the long term, since the turn of this century. The combined contributions of dividends and capital gains are presented in tabulations for XOM (and many other stocks) in Yahoo Finance's Historical Prices section. There, in the last column to the right, the current-day's price is adjusted in all prior days for dividends paid and any stock splits.
We split the 17+ years into a first decade, and then the remainder of 7+ years, to see if there has been any significant difference for XOM between the two periods. We know that there were marked periods of market volatility during the first decade, less stressful ones in the second period.
For each period we measured only the stock's price CAGR, and then also the combined return of price change capital gain plus accumulated dividends as determined by the Yahoo adjusted (discounted) price.
source: Yahoo Finance
The proper (often not shown) growth-rate calculation is to determine the number of days between the starting and ending dates and calculate the percentage change per day that will move the price at the start to the price at the end, compounding each day's impact over the entire holding period.
During the first decade of Figure 1, the Yahoo-adjusted price of $53.75 at the end date was 1.988531 times the start price of $27.03. In the 3,654 days involved it took a daily gain of 1.9 basis points (1/100ths of a %) to make the trip. When that daily increment is compounded to its 365 th power it becomes 7.1% (per year).
Over the same period, but measuring the actual closing prices of XOM, adjusted only for the 2 for 1 split which occurred, the same process of calculation produced a capital gain rate of 4.8%. By deduction, dividends added +2.3% to the total CAGR.
In the more recent 7+ years, a combined CAGR of 8.3% per year has been composed of 5.3% in capital gains, and 3.0% in dividend accumulations, all properly credited and compounded at their appropriate payment dates.
Why make such a fuss over scorekeeping?
Because there are alternatives to the strategy of buy&hold that has performed so well in XOM. And to be sure that the results of alternatives are being measured fairly, we want to require that the same clear methods are used, particularly where irregular time periods may be involved.
XOM is one of over 2500 equity securities, including ETFs, that we examine every day. We want to see what activities in open competitive markets could imply what might be happening to their prices over the near future.
The activities in several derivative securities markets of options, futures, swaps, and others are quite different from the markets for stocks and ETFs. The big difference in these derivative markets is that what is traded is contracts that have a specific life, beyond which the contracts terminate, cannot be exercised, and have no further value.
Stocks and ETFs, on the other hand, are open-ended properties whose present prices depend upon the hopes and despairs (or cash needs) of the buyers and sellers. Their coming prices are indeterminate, despite the often one-sided assertions of analysts that past price actions indicate some conviction by one side of the combatant buyer or seller groups. Such assertions imply the other side has little or no influence on the price, despite the necessity of their being present for a transaction price to exist.
In equities, the principal mission of the market is momentary price determination. What is the price that currently balances supply of, and demand for, the specific security?
But in the derivatives markets explicit considerations about what could happen to the price of the underlying equity security are embedded in the contracts being traded. Unforgiving arbitrage economics drive the prices of contracts, forcing the expectations of participants into the open. Buyers and sellers are still opponents, but their transactions now are over what may realistically happen in the future. There is always room for agreement over a range of underlier price outcomes, and this is what derivatives bargaining is over, not single-point price.
The market-derived existence of those likely price ranges provides the basis for hedging risk exposures that are essential in making possible large volume transactions in stocks and ETFs.
So we have from those professionals in the derivatives markets, forecasts of the reasonable ranges of prices for many securities. Securities of interest to big-money funds and investment organizations who have the money muscle to move prices. Players who are in constant communication with market-makers [MMs] who can facilitate the large-scale trades needed.
How to profit from this forecast information?
We now will use their prior forecasts for XOM to illustrate how more active investment strategies may be more productive for investors who, because of impending financial milestone needs, require CAGRs greater than a continuation of what Figure 1 suggests.
The price range forecasts implied by the hedging and arbitrage activities present in these derivatives markets are often unequally balanced between what might occur to the upside from the current price, and what might occur to the likely downside. That imbalance is measured by a metric named the Range Index [RI]. Its numeric is the percentage proportion of the entire range that lies below the current price.
Think of the RI as a price tag on the opportunity to play in the subject security's price-change payoff game over the next few months. The lower the RI the better value may be present, because the size of the upside payoff should be larger.
With stocks (or ETFs) where there is large uncertainty this value presumption is often valid. An example can be SPDR Gold Trust (NYSEARCA:GLD). When we look to see how its price has changed in the weeks following daily forecasts over the past 5 years, we have Figure 2.
Here the price changes of all of the past 5 years days are averaged in the blue row of the table. Its negative values indicate the poor capital gains experienced on average by indiscriminate buyers of GLD during the 80 market days (16 weeks) following each of the past 5 years daily forecasts.
The table is set up to show the progressive advantage of investors who may buy when the upside [RWD] proportion of the range is large relative to the downside [RSK].
At the 15 to 1 level (a RI of only 7 or less) hedger assessments of coming likely prices offered double-digit CAGRs for these short periods of up to 16 weeks. The problem is that 39 buys out of 1256 isn't a lot of opportunities in 5 years - only about 8 days a year if they were all spread out evenly (which often they are not).
But now in Figure 3 look at how the hedgers in XOM appraise its prospects. This is a quite different picture, since most investors (and apparently its management) view its mission in a very different (although natural reources-related) light.
Figure 3 is of the same construct as Figure 2. But where market prices for GLD never got as high (relative to expectations) as having prospects for twice as much downside as upside, that has happened on occasions for XOM.
When it has, XOM's market behavior shifted from being a value security to being viewed as a momentum stock. Then shorter-term investors found attractive price moves over the near term. Where hedging forecasts limited the upside price change likelihood to only half of the downside (a 1 to 2 RWD to RSK ratio) the odds of reaching that upside forecast (not shown here) improved markedly, to 6 out of every 8 (75 /100) or better.
But again, the long-term nature of XOM's usual market action provides very few shorter-term capital gain opportunities at either the under-valued or the approaching fuller-valued extremes. The #BUYS column shows only 46 opportunities in that 1 : 2 (or better) row.
The bulk of the time XOM hedging appraisals are in that mid-range concentration between RWD~RSKs of 2 to 1 and 1 to 2, hidden from view in Figure 3 by the overall averages of all forecasts. It turns out to be useful to examine that large body of opportunities more carefully, with a finer granularity between levels of RI forecasts. We do that in Figure 4.
Again, Figure 4 is of the same construct as Figures 2 and 3, but the blue averages row has been shifted to a RI of 40, from the RI 50 ( 1 to 1 ). The rows now are denominated in RI terms instead of upside reward and downside risk proportions. Otherwise the same notions prevail, of rows containing only the more constrained opportunities as their forecasts move away (up and down) from the overall average.
The #BUYS column provides the count of forecasts whose row price change averages are in the 16 weekly columns, cumulatively, to the right. All these price changes are shown as CAGRs in order to make comparisons between differing holding periods easier.
Now what was transpiring in Figures 2 and 3 in the rows between 2 to 1 and 1 to 1 may become more apparent.
Please keep in mind that the entire experiences for XOM range between RI forecasts of 2 to 80. The RIs of 41 to 80 contain stronger positive price changes than do those of 2 to 40 , where the negative changes tend to occur. Those outside of RI 29 and RI 49 are not shown explicitly, but are contained in those upper and lower extreme rows.
The result is that investors with long positions in XOM tend to be better satisfied over the next 16 weeks with buys acquired when hedging forecast RIs are above 40, than with those acquired below 40. And the differences are striking, making it desirable to favor XOM acquisitions in a timely fashion, no matter how long a holding may be intended.
To have some sense of how important such choices may be, Figure 5 translates the CAGR data of Figure 4 into the ODDS of a profitable outcome (at each RI and holding period) on an X out of 100 basis.
The average blue-row outcome for XOM buys in these periods are odds-on profitable, although not significantly so. As RI forecasts rose from 40 towards RIs of 50 the odds for profit increase to 6 out of 8 (75 / 100) and 7 out of 8 (87 / 100). Not shown, those odds on the 1 to 2 RWD to RSK row of Figure 3 continue at the 80+ / 100 level.
Can the forecasts be improved upon?
What the tables in Figures 2-5 show are simply what has happened to market prices in periods of varying lengths up to 16 weeks after hedgers' implied price range forecasts. The progress of price changes varies with the RI levels of the forecasts, including declines from interim higher prices as time periods are extended. That is the way stock prices move in everyday markets, when undisciplined by any strategy.
For long-term investors in XOM, intending to hold their investments for periods far longer than only four months, the principal benefit of the forecasts is in finding advantageous entry points for XOM buys when new employable capital is present.
What can less well-fixed investors do?
Other investors, seeking high-quality, low-risk investments, may have investment milestone requirements or objectives more demanding than can be met by the CAGRs of XOM suggested in Figure 1. But they should not be denied the benefits of XOM investment if adequate rates of reward can be found therein, when they are available.
For those investors an active investment strategy makes sense. What is needed is a simple strategy which enters investments that have had prior experiences of attractive CAGRs following forecasts similar to what is being seen currently. A strategy where investment price gains, net of inevitable losses (despite being held to a minimum by risk management disciplines), have CAGR rates elevated not by financial leverage but by being time-efficient in the holding period discipline. A discipline that keeps capital employed in more promising investments after the earlier commitment's target has been reached.
We use such a strategy to provide a means of standard scoring the capital gains attractiveness of the over 2500 stocks and ETFs which we analyze daily. We set sell targets using the top of price range forecasts implied by the self-protective hedging done by market professionals who are called on to facilitate volume transactions. We limit holding periods striving to reach the target to 3 months, based on typical experience with such forecasts.
This strategy has acquired the acronym TERMD for its Time-Efficient Risk-Management Discipline.
These forecasts have all been derived from the same unchanged model during the entire 17+ year period, regardless of the nature of the subject security's business activity. For any one stock the varied Range Index proportions of upside to downside prospects provide the same kind of selection guide suggested in Figures 2-5.
Since we have daily forecasts back to the start of the 21st century we can draw on prior forecast experiences to estimate how likely and how large profits and losses may be, at each level of RI.
Using Exxon Mobil as an illustration
The following Figures 6 and 7 display the relationship of TERMD price change outcomes to the daily Range Index forecasts which preceded them. In all cases the entry cost of each "position" was the end-of-day price of the first market day following the forecast. The ending, or closeout price was the e.o.d. price on the first day such a price equaled or exceeded the target. If that had not happened in 3 months, then the closing price of the 63rd market day after the forecast closed the position.
Because this performance scorekeeping strategy produces holding periods of varying lengths, measurements need to be kept on the basis of the per-day gains or losses for each position. The traditional units of measure in such analyses are basis points, or 1/100ths of a percent, as were used in the Figure 1 calculations of XOM long-term return rates.
As we did in Figure 1, we split the whole period in two parts to determine if there was any significant change in the relationship of Range Index to rates of TERMD profitability. The scatter of Figure 6 shows the first decade, and Figure 7 shows the following 7+ years.
In both multi-year periods, better rates of price gain followed higher RIs. While this is not what may be expected from a strong-dividend-paying "value" stock, it is a persistent, imprecise relationship of market action to professional price expectations in the case of XOM. One that showed up in Figure 3, confirmed in 4 and 5.
While the basis points per day appear as trivial amounts, when annually compounded they are quite significant multiples of the long term CAGRs in Figure 1. The CAGRs of High RI forecasts in Figure 4 are 4-5 times those of the blue row average.
What can be learned from the two scatterplots is that the proportions of profitable TERMD outcomes above the 0.000 breakeven line (the win odds) improve significantly when RIs are above 50.
To make this clear we cumulated those win odds from the highest RIs to the lowest to see where the best advantages existed. This was done for each period, again looking for changes in market forecast perceptions. Figures 8 and 9 do not find any significant differences.
So it seems apparent that buying XOM when its hedgers' forecasts are in the upper 40s of Range Index or higher are the better bets. At the RI level of 45 or above, Figure 5 tells us that there have been some 250 of these in the past 5 years, about 50 a year, or the equivalent of one a week.
But they may not appear on schedule like city buses. And investors pressed for performance by milestone deadlines sometimes need alternative vehicles in quick order.
To resolve that concern, blockdesk.com subscribers YTD have been able, day after day, to obtain intelligence lists which have named, 20 at a time, some 200+ stocks and ETFs at over 1200 opportune times (with repeats) to catch capital gains at CAGR rates averaging +42%, using the TERMD discipline.
For investors who are up against investing milestone time pressures there are ways to accelerate wealth-building without taking undue risks. The principal advantage at hand is being more time-efficient in working your capital. As the XOM illustration shows, the opportunities to obtain attractive double-digit rates of capital gains are frequently present to be utilized.
They require more attention, effort, and mental agility than dozing in the hammock of buy&hold but active investment management can produce substantial results, consistently.
Additional disclosure: Peter Way and generations of the Way Family are long-term providers of perspective information (earlier) helping professional and [now] 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.