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(B)(N) The Market

May 28, 2014
M. Poincare after a short break. Courtesy: Scientific American, December 1986.

Figure 1: M. Poincaré after a short break.
Courtesy: Scientific American, December 1986.

Drama. Pundits of all sorts and investment advisers of every stripe, continue to “ponder” the market and look for its future. We have today, this very day, been regaled with such earnest sentiments as would embarrass Zarathustra (600 BCE), and they are protected by the 1st Amendment.

They are all right!

Figure 2: They are all right but when will they be right?

Of course, they are all right (please see Figure 1 on the right and Figure 2 on the left), but that’s yesterday’s news, and who will be right?

Our view is much simpler and we’re never confused and we’re never disappointed by what the market has done for us.

All that we ask is what is fair – we want our money to be safe – 100% capital safety – and available to us when we might need it – 100% liquidity – and we want a hopeful but not necessarily guaranteed return above the rate of inflation which, if we don’t get it, is just another way of losing our money. Thank you very much.

And when we do that, the market unfolds (as in Figure 1 above) and reveals itself as a part that behaves like a risk-free high-grade corporate or government bond (the (B)-companies), and a part that behaves like an at-risk portfolio of stocks beset by uncertainty (the (N)-companies). Please see Exhibit 1 below.

Exhibit 1: S&P 500 The Market – Fundamentals – June 2014

S&P 500 The Market - Fundamentals - June 2014

S&P 500 The Market – Fundamentals – June 2014

(B)(N) S&P 500 The Market - Risk Price Chart - June 2014

Figure 3: (B)(N) S&P 500 The Market – Risk Price Chart – June 2014

(B)(N) S&P 500 The Market - Risk Price Chart - June 2014

Figure 4: (B)(N) S&P 500 The Market – Risk Price Chart – June 2014

The chart on the left shows the performance of the S&P 500 since 2012, and the market was up $3.5 trillion last year for a gain of +27% and, despite all odds, is up a further $855 billion and +5% so far this year. It also paid $364 billion in dividends to its shareholders for a return of earnings of 38% and an aggregate dividend yield of 2.1%; please see Exhibit 1 above for further details.

The Perpetual Bond™ did even better in that same market, and it was up +48% last year and a further +6% so far this year; please see Figure 4 and the market values for the “(B)-companies” and Exhibit 1 above for further details, and click on the link (and again to make it larger if required) “(B)(N) S&P 500 The Market – Prices & Portfolio – June 2014” for all the details of what we held and when.

And even more importantly, what we didn’t.

The “Fair Value” portfolio is a classic “long-short portfolio” (please see Figure 4 above where it is marked as the thick black line) and it is the “fair market value” of 50% of our money in the (B)-companies and 50% of our money in the (N)- companies, and it returned +10% in 2012, +18% in 2013 and +4% so far this year (plus dividends, of course); that might seem “volatile”, but who are we to determine “fair value” – that’s determined by what investors are willing to pay to buy and hold the (B)-companies, and what they are not prepared to pay to buy and hold the (N)-companies which they sell short if nervy enough, or buy on “value”, for which reason we don’t know (please see the (N)-companies below).

And that’s the stuff of the “long-short” hedge fund which got some piece of the increase in the difference between the market value of the (B)-portfolio, which is now $15.8 trillion, and the (N)-portfolio, $1.8 trillion, which it sold short.

What makes the “Fair Value” portfolio unique is that it puts half our money into stocks that are trading above the price of risk (the (B)-portfolio), and half our money into stocks that are trading below the price of risk (the (N)-portfolio), and the percentage content can be varied depending on whether investors think that we are in a “bull market” or a “bear market” or they’re doing the old “risk-on/risk-off” routine.

When such investors “take profits”, they need to put their money somewhere, and we can see from Figure 4 that in 2012 they sold companies in the (B)-portfolio and bought companies in the (N)-portfolio, and they did it twice and again in 2013 to a lesser extent, although they could also have bought cash as a money market fund, or also bought more of the (B)-companies even though those, generally, appear to be “high-priced” to “price players” and “profit takers” who are looking for “value”, or “bond players” who are looking for “safety”.

However, if they kept the companies that they bought in the (N)-portfolio, then they got the result for “(N)-companies” which was down minus (-48%) last year and a further minus (-6%) so far this year and obviously, lots of investors did, else the stock prices might be zero which is the ideal short position; please see Figure 4 above and Exhibit 1 for further details.


The “long-short” portfolio cuts both ways, doesn’t it?

Managing the “Fair Value” portfolio as a “long-short” portfolio is not difficult, but we need to pay attention to the stop/loss in the case of the (B)-companies, and set a target price for the (N)-companies, which we are short and will need to buy back if the price increases, as well as pay dividends while we are short.

In contrast, the Perpetual Bond™ only buys and holds the stock of companies for which the ambient stock price appears to be above the price of risk, and, generally, we also need to protect or lock-in its prices with an attentive stop/loss policy because we have no idea what will drive the market on any day (please see Figure 4 above and click on the chart to make it larger if required), but if after taking profits, the company is still trading above the price of risk, we will generally buy it back, and can even afford more of it. We never buy companies in (N) because those companies are “overvalued” regardless of their price, and they are  further burdened by investor uncertainty.

But, as a result, we don’t have a “view” of the market. We just accept it as it is, and therefore, the “market” is our friend, in “good times” and “bad times”. That’s just how it is.

Please see our Post “(B)(N) The Small-Cap Guy” for another example of “The Separation Theorem” in the less richly endowed S&P TSX Completion Index and “(P&I) My Name Is Bond (James Bond)” for a synopsis of the S&P 500 from the point of view of pension funds.

For more applications of these concepts please see our Posts which rely on the Theory of the Firm developed by the author (Goetze 2006) which calibrates The Process to the units of the balance sheet and demonstrates the price of risk as the solution to a Nash Equilibrium between “risk-seeking” and “risk-averse” investors within the demonstrated societal norms of risk aversion and bargaining practice. And for more on The Process, please see our Posts The Food Chain and The Process End-Of-Process.

And for more information on real “risk management” and additional references to the theory and how to read the charts and tables, please see our Post, The RiskWerk Company Glossary; we’ve also profiled hundreds of companies in these Posts and the Search Box (upper right) might help you to find what you’re looking for.

And for more on what risk averse investing has done for us this year, please see our recent Posts on The S&P TSX “Hangdog” Market or The Wall Street Put or specialty markets such as The Dow Transports & Utilities or (B)(N) The Woods Are Burning, or for the real class actionLa Dolce Vita – Let’s Do Prada! and It’s For You, Dear on the smartphone business.

And for more stocks at high prices, The World’s Most Talked About Stocks or Earnings Don’t Matter – NASDAQ 100. And for more on what’s Working in AmericaBig OilShopping in America or Banking in America, to name just a few.


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
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


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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