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(B)(N) PG Proctor & Gamble Company

April 17, 2013

Drama. There is a drift in the economy towards the acceptance of longer payment cycles, meaning that we might receive a good or service now but are not expected to pay for it for quite some time in the future, and the obverse, that we who are providing said good or service, should not expect payment until quite some time in the future (The Wall Street Journal, April 16, 2013, P&G, Big Companies Pinch Suppliers on Payments). That observation is, of course, a commonplace of both business and consumer affairs; apart from minor items that we might pay for in cash, out of our pocket change to save time or because we don’t have a “smart phone”, when, and for what, was the last time that we paid or received cash? It is also symptomatic of a mature, and sometimes desperate, economy in which there are too many, and too much, goods and services chasing too few buyers – wanting for buyers, so to speak – that (almost) everything is available “on time”. In the case of P&G and most other large retailers, of course, it’s an “honour” to be on their shelf waiting for a buyer, and we should expect to “fund” that experience out of our own pocket.

Which brings us to our investments for which we are expected, and, generally, required to pay for in cash, now, even if we have borrowed the money elsewhere or from the same bank or broker to do it. We have often said that an investment is just and only the purchase of risk – and that’s the only way to think about it; please see our Post, The Price of Risk, August 2012 –  but the trick to buying it, is to never pay for it. How do we do that? Well, it’s one of those goods that are available in quantity, more than we can ever buy, and, therefore, begs to be bought “on time” if we are at all astute about it.

For example, we bought the stock of Proctor & Gamble in 2009 for $42 (in cash) and have held it ever since, through the current price of $80 (Red Line Stock Price (SP) above the Black Line Risk Price (SF)) and we have received a typical dividend yield of 3% per year, which exceeds the rate of inflation and is currently $2.40 per year, in addition to a capital gain of nearly 100% in four years. And we’d buy it and hold it now, at $80 (again, in cash, the “late” price for those who don’t know when and what to buy), expecting that at least some of that performance will obtain in the future and knowing that the cash in our pocket can only depreciate and doesn’t earn either interest or dividends.

And we can get it for “free”, by effectively deferring “payment” for the risk, indefinitely – unless we really need the cash, in which case we can’t afford to buy it (and “payment” is indefinitely deferred, by definition) or, in our case, we need only sell half of it to get back what we paid for it and hold the rest for “free” – by buying the stock (for cash, alas) and “collaring” the stock price to offset the “risk”. There is a great variety of “futures” – puts and calls against our long position – available for the stock of Proctor & Gamble, but we note that it’s trading today at $79 and that price is well above the “price of risk” which we calculate as the Risk Price (SF) of $64. Our estimate of the downside due to volatility is minus ($5) so that we should not be surprised by a stock price as low as $74 or as high as $84 at any time. (Please see our Post, Popoviciu’s Volatility, October 2012, to understand the theory and practice behind that calculation.)

On the other hand, the stock is trading well-above the price of risk and is, therefore, an “economic free good” (please see below) which is effected by investors who are willing to buy and hold the stock at that price, and absent disheartening news or a “surprise”, will not easily be moved to sell it for less. We can therefore think about a long horizon; the October put at $77.50 can be bought today for $3.25 and an offsetting sold or short October call at $82.50 against our long position, can be sold today for $1.32, so that for a net cost of $1.93 per share ($3.25 less $1.32) for the “collar”, we can hold the stock for the next six months, collect our dividends, and be assured of a price of no less than $77.50 but no more than $82.50 unless we also trade or roll the options forwards and upwards as more information becomes available. That’s “free” money, available to us because we are investors and have bought the risk and deferred “payment” for it, indefinitely.

Exhibit 1: (B)(N) PG Proctor & Gamble Company – Risk Price Chart

(B)(N) PG Proctor & Gamble Company

Procter & Gamble Company is focused on providing branded consumer packaged goods. It markets its products in about 180 countries through mass merchandisers, grocery stores, membership club stores, drug stores, and department stores.

(Please Click on the Chart to make it larger if required.)

The calculated Risk Price (SF) is a provably effective estimate of the “price of risk” which is “the least stock price at which the company is likeable” (Goetze 2009) and “likeability” is determined by the demonstrated factors of “risk aversion” – we want to keep our money and obtain a hopeful return above the rate of inflation.

Stock prices that are less than the price of risk are “bargain prices” but with the risk attached that the company might never get a higher price other than that due to ambient volatility or “surprise”. On the other hand, investors who are willing to pay the “full price” above the price of risk, and buy and hold the stock at those prices, must also be confident, and have reason to believe, that the company will produce those values, absent new information. Please see our Posts, The Price of Risk, August 2012 and The Nash Equilibrium & Its Stock Price, October 2012, for more details.

Postscript

We are The RiskWerk Company and care not a jot for mutual funds, hedge funds, “alternative investments”, the “risk/reward equation” and every other unprovable artifact of investment lore. We have just one product

The Perpetual Bond™
“Alpha-smart with 100% Capital Safety and 100% Liquidity”
Guaranteed
With No Fees and No Loads on Capital

For more information on RiskWerk, please follow the Tags or Categories attached to this Letter or simply enter Search for additional references to any term that we have used. Related data may be obtained from us for free in a machine readable format by request to RiskWerk@gmail.com.

Disclaimer

Investing in the bond and stock markets has become a highly regulated and litigious industry but despite that, there remains only one effective rule and that is caveat emptor or “buyer beware”. Nothing that we say should be construed by any person as advice or a recommendation to buy, sell, hold or avoid the common stock or bonds of any public company at any time for any purpose. That is the law and we fully support and respect that law and regulation in every jurisdiction without exception and without qualification to the best of our knowledge and ability. We can only tell you what we do and why we do it or have done it and we know nothing at all about the future or the future of stock prices of any company nor why they are what they are, now. The author retains all copyrights to his works in this blog and on this website. The Perpetual Bond®™ is a registered trademark and patented technology of The RiskWerk Company and RiskWerk Limited (“Company”) . The Canada Pension Bond®™ and The Medina Bond®™ are registered trademarks or trademarks of the Company as are the words and phrases “Alpha-smart”, “100% Capital Safety”, “100% Liquidity”, ”price of risk”, “risk price”, and the symbols “(B)”, “(N)” and N*.

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