The “losers” of this contest
Losers, in terms of their MM-expected price change forecasts, along with market and group ETF comparisons, the comparative "winners".
(Note: All materials from blockdesk.com have been approved for this article)
Intersections of these expected Reward (green horizontal scale) prospects and experience-demonstrated Risk (red vertical scale) exposures are the products of the current self-protective actions of the best-informed investment market professionals.
The most favored positions on this trade-off map are down and to the right. Note the locations of SPY at  and DIA at .
These extreme price change prospects are defined by looking forward in time, as indicated by the derivatives contracts used by MMs to protect themselves from untoward future events, not by looking backward at past prices in technical analysis “charts”.
If history is important to you, then use it to tell how frequently the forward-looking MM forecasts from prior circumstances actually earned profits, and how often they cost a loss. We do that and tell the results as Win Odds, the number of profitable forecasts out of 100. Those details are spelled out in the table of Figure 2.
The Figure 1 upside price change forecasts are seen in column [E] here in Figure 2. The downside ones are in column [F]. The remaining columns are a history of what happened when prior forecasts of each issue had upside-to-downside proportions like their current forecast.
Key to those proportions is in the Range Index [G], which tells what proportion of the overall forecast range from [B] to [C] is between [D] and [C], the downside component. The Disney (DIS) RI of 20 says that the other 80% of the range to the upside is 4 times as large as the downside.
But is it 4 times as likely? Not according to relevant history, seen in [H].
There, a sample [L] of 60 prior days forecasts out of the past 5 years 1,261 days [M] found that only 35% of the sample resulted in profitable position outcomes in the next 3 months following each of the 60 forecasts. Roughly 2 to 1 odds against a buyer under current forecast proportions.
Was DIS a disaster? Not in terms of capital loss. Column [I] shows the 60 sample positions produced a net loss averaging only -0.1%.
But in terms of the loss of irreplaceable, precious time, it was a loss to be avoided if there were better, more productive ways to work the capital. For example, consider the historical productivity of the SPDR Dow Jones Industrial Average ETF (DIA). If, instead of being invested in DIS, that capital was put to work in the DIA, and if DIA had produced what it did (the average payoff of +2.5% in [I] in DIA’s prior sample of 83 experiences from the same 5 years), then the portfolio would have that much more to show for its TIME investment.
The alternative of an SPY investment instead of DIS could have been almost twice as good as the DIA.
The MM-hedging forecasts almost always have an upside prospect. But it does not always get achieved, as the Figure 2 results for MCD, VZ, XOM, WBA, and IBM testify in column [I]. Column [N] provides a test of the credibility of the [E] upside forecast against the [I] results from the sample. For these stocks, their [N] is negative, while for DIA and SPY, it is positive.
It only takes a glance at Figure 3, a comparison of [H] Win Odds with [I] %Payoffs, to identify the winners in this contest.
DIA at  has a positive payoff, but at Win Odds less than 80 out of 100. Other than SPY at , all the others are in the  time-out corner. For good reason.
TIME is invested in parallel with capital
And once it is unproductively spent or lost, it cannot be regained. Put the retirement off by another month, year, or decade. Or, the kids may outgrow their opportunity to go to college.
That is why it is essential to manage investment time as carefully, or even more carefully, than investment capital. Capital losses may be recovered, not time.
In Figure 2, the [J] column tells what amount of time investment in market days of each average position from the sample it took to earn column [I]. It can be factored into the selection process of deciding which stock or ETF the portfolio should hold during the coming forecast period. So can be the odds for profit told by column [H].
Columns [O] and [P] are the [H] and 100-H weightings of [I] and [F]. Added together, O + P = [Q], a risk-adjusted net return prospect - if history is repeated. Not all history of some multi-year trend, just that part of the relevant forecast-able history. To make the measure comparable across the varied alternative investment candidates, we make the risk-adjusted net return prospect stated in time-adjusted terms: basis points of gain per day of capital involved. [Q] translated by [J] does that in [R]. (A basis point is 1/100th of a percent, and 19+ bp/day sustained for a year = a 100% CAGR - a double of the capital.)
Do your assured resources allow a passive, buy & hold investing strategy?
If they do, you are indeed most fortunate. For you can afford to be profligate with investment time.
Few of us can afford to see time intentionally wasted in the major portions usually involved with stock and ETF downside fluctuations and the recovery periods necessary to regain what they once had accomplished. But that is blithely ignored in every buy & hold strategy.
No one is going to reliably buy at the bottom and sell at the top of equity investments. But there is enormous advantage in avoiding the unproductive periods as much as possible and adopting an Active Investing strategy that seeks to identify the odds-on productive periods, issue by issue.
Many investors are not aware that the role of the Market-Maker requires he/she does that as well as possible. The MM trading desks are staffed with folks of iron stamina and good fear management, supported by staffs of tens of thousands of information gatherers and hundreds of well-trained evaluators and competitive analysts. An able MM trader can legally earn a full bankbook for a 100-year life in 5 years or less.
The way 21st century equity markets operate, what MMs know and decide can be (and is being) a helpful guide to the Active individual investor. We have a few hundred of them, and room for more who will run their own portfolios with their own judgment and an assist by market intelligence we can provide. They do lose some money, only winning from 5 out of 8 to 7 out of 8 positions, but compounding the wins over more efficient time investments than the losses. Capital gains far better than "the market" predominate. If this is of interest, check out what is at blockdesk.com.
Meanwhile, a parallel article to this one will be immediately begun on what are the best stocks among the 30 Dow Jones issues for the Active individual investor to consider as buys at this point in time. They are probably some different than yesterday’s.
Many perfectly sound (but relatively unproductive) DJIA stocks at this point in time have informed prospects where capital would be more effectively invested in the SPDR Dow Jones Industrial Average ETF (DIA) or in the SPDR S&P 500 Index ETF (SPY). Still even more productive opportunities exist. Stay tuned.
Disclaimer: 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 in the SA blog of my name. First months of 2019 to date have produced over 1100 profitable position closeouts at +140% annual rates.
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.