'Today's Best Portfolio' Concept - A Look At Single Investing Objectives

by: Peter F. Way, CFA


Your best portfolio: one that is a blend of a dozen or more securities which in coming months further your investing goals within boundaries of discomfort tolerable to you.

We’ve all had a slightly different mix of life experiences, causing us to emphasize varied investing objectives in different ways, of greater or lesser importance.

That makes investment markets work, finding securities prices that best meet the balance of investor desires and aversions – at this point in time.

Prices always on the move, rebalancing hopes and fears in anticipations of what today’s and yesterday’s events will bring in the foreseeable future.

Some market professionals successfully (not perfectly, but as good as possible) anticipate thousands of coming securities price changes in ways that can help your portfolio.

Your Investing "Holy Grail" - one piece at a time

This series of articles monitors today's expectations of the best prospective near-term satisfactions for a variety of investment objectives just one at a time for a dozen equity securities - stocks and ETFs - out of thousands available each day.

Objectives such as: Most likely near term price gains; biggest likely price gains; soonest likely big price gains; smallest price drawdowns on the way; least likely to produce a loss; most credible price gain expectations; most credible price drawdown expectations; best trade-off of price risk for price reward.

The best dozen securities each day in the investing dimension under examination are ranked from thousands of equities being traded by major investment organizations. Ones managing billion-dollar-plus portfolios for various mutual funds, institutions, hedge funds, pension funds, family and individual investment money managers, endowments and trusts.

Organizations which constantly attempt to improve their portfolios by moving from less-attractive to more-attractive holdings, as their research and analysis suggests.

The focal point of observation of their efforts lies in the activities of investment market professionals who help them make transactions of the size necessary to have meaningful impact on the portfolios involved. That professional community is known as market-makers [MMs].

Much of today's investment transaction activity is handled by highly-automated electronic systems, a technological evolution that has dramatically transformed stock exchanges and other investment markets from what they once were in the 20th century and earlier. Transformed into 21st-century operations that in nanoseconds can match buy and sell orders into confirmed transactions, notified to the involved buyers and sellers in moments rather than days.

But a large part of the trillion-dollar daily transaction volume is not done that way, since it comes in large lumps from the big-money portfolio managers. The automated systems crash if fed big order imbalances between buyers and sellers. Imbalance types in both directions are seen every day in thousands of issues, unfortunately just not at moments that permit an easy match-up.

Market-makers provide "liquidity" by rounding up what "other side of the trade" is momentarily available for each "block trade". A trade to be done all at once, at one price. They may then "fill" the remainder of the imbalance, long or short, by taking a temporary position using the MM firm's own capital.

Before that commitment to put the firm's capital at the risk of market prices moving against their position, they negotiate a separate but related hedging transaction to protect themselves against such damage until they can unwind the position.

The cost of that insurance is woven into the trade spread paid by the portfolio manager issuing the trade order, so it has to be of reasonable proportion or the trade order gets "killed" by the issuer.

The cost of the insurance and its structure in the derivative markets where arranged, has to include the present expectations for coming prices of the stock trade subject by both sides of the hedge deal.

Both sides are well-informed, researched, and evaluated for by their own internal staffs. So the hedging deals define the price range extremes seen likely for the stock or ETF trade subject, during the life of the derivatives contracts providing the price-change protection.

This process has been going on since even before the turn of this century, and has been improved upon as technology advances. So there is a history of prior daily implied price forecasts. Over ten million of them, for thousands of stocks, in just the past decade-plus.

That history lets us look at how well the forecasts were met by the realities of market actions.

From it we can compare today's forecasts with the past to evaluate (and rank) their credibility and their likelihood. No guarantees, but these are better, more consistent, more believable appraisals than most alternative sources currently available.

And since all the forecasts have to do with price change and its uncertainty, they are all highly comparable with one another, regardless of the underlying relationship of the security to the rest of the world. Such details already have been digested by those trading in its future price expectations.

The purpose of this article series

It is to let investors see which stocks and ETFs provide the best-ranked securities meeting various investing objectives. Not only the obvious "how high", "how sure", "how soon" kinds of price questions, but those questions of forecast credibility and of concerns over risks and their trade-off with benefits expected.

Take a look, and see if they may offer helpful selections or suggestions on a variety of your portfolio investment considerations.

Additional disclosure: Peter Way and generations of the Way Family are long-term providers of perspective information, earlier helping professional investors 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 D-I-Y investor guidance what the arguably best-informed professional investors are thinking. Their insights, revealed through their own self-protective hedging actions, tell what they 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.

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