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(B)(N) Volatility Ho! – Ha!

October 18, 2014
The Bull Chase and the Bear Embrace

The Bull Chase and the Bear Embrace

Drama. Volatility is breaking wind again and the problem is not “fundamental” as if something is different this week that we didn’t know last week, or the week before, but the cause is the “crappy” models (which can’t be explained) that are in regimental use by the institutional investors who can spell the word “v-o-l-a-t-i-l-i-t-y” which we’re challenged even to type (Bloomberg, October 18, 2014, Investors Shaken as S&P 500 Reversals Ignite Volatility).

There are epidemic “worries” in the small caps and the transports, and in the S&P 500 (which we’ll look at below) but, despite the tabloids, there are lots of investors who see volatility as a chance to buy more stocks at lower prices, and we’re always protected from the “quick march” and “chicken walk” by the “One Rule” – 100% capital safety, 100% liquidity, and a hopeful but not necessarily guaranteed return above the rate of inflation – that separates the investment-grade (B)-class companies from the (N)-class companies that are beset by investor uncertainty, and which are the bread and butter of the formula-volatility players, not all of whom are “small” and used to margarine when they play the spread.

The fact that their models are impertinent doesn’t matter; random results are as likely to be right half the time as wrong, and they can blame the “markets” for the other half whichever – what can we say but that is a “winning formula” for those savants who don’t have to rely on our pensions and endowment funds for their early retirement – if we could just convince them of it, because these are not our grandfather’s markets; please see Exhibit 1 below for the antidote.

Exhibit 1: (B)(N) Volatility Ha! – All Markets Summary – Fundamentals

(B)(N) Volatility Ha! - All Markets Summary - Fundamentals

(B)(N) Volatility Ha! – All Markets Summary – Fundamentals

There’s not too much overlap in these markets (please see Exhibit 1 above and click on it to make it larger and again if required), so we’re talking about $28.7 trillion of investors money which paid $642.5 billion in dividends last year for an aggregate return of earnings of 38.5% to their investors and a dividend yield of 2.2%, and all they had to do was not to go into work every day.

The earnings return on the shareholders equity is 15.4% so we’ll be looking for that number in our annual pension plan reports, and that’s less than the 24.3% in the NASDAQ 100, and the 23.4% in the Dow Transports, not to mention capital gains of +13% so far this year should we have some unexpected expenses; perhaps there’s some other line of work for our “worried” pension planners who can’t say “not to worry, we’ve got a handle on it”; please see Exhibit 2 below.

Exhibit 2: (B)(N) Volatility – Ha! – S&P 500 – Risk Price Chart

Figure 2.1: (B)(N) Volatility Ha - S&P 500 - Risk Price Chart

Figure 2.1: (B)(N) Volatility Ha! – S&P 500 – Risk Price Chart

Figure 2.2: (B)(N) Volatility Ha - S&P 500 (N)-class - Risk Price Chart

Figure 2.2: (B)(N) Volatility Ha! – S&P 500 (N)-class – Risk Price Chart

Volatility is not an investment risk for us; we’re forced to take profits at the stop/loss, and we can buy them back at lower prices, with more money, if they’re still trading above the price of risk, and also shop-around for anything new that looks “perky”.

Ninety-eight companies dropped-out of the (B)-class this month, and the (N)-class companies has “ballooned” from fifty-eight companies in January, to sixty-three companies in September, to 158 companies today; please see Figure 2.1 and 2.2 for summaries and click on the links (and again) “(B)(N) Volatility Ha! – S&P 500 – Prices & Portfolio and Cash Flow Summary” for more details.

The price of risk is not hard to figure out; it’s always no less for us than the price that we paid for the stock, but the issue is whether we can defend that price with a useful stop/loss or sell-point below the current price – not above it – because we’re not too worried if investors want to pay more for the stocks that we own; absent liquidity needs, we can just raise the stop/loss and sell it to them another day.

Not to worry, we've got a handle on it.

Not to worry, we’ve got a handle on it.

The problem with stocks in the (N)-class is that they have no bottom, and there’s no useful defense against ambient volatility; they’re also beset with investor uncertainty, and the only stock price that can be believed is the one that’s low enough that other investors might be thinking about buying the whole company, and “fixing it”, if it can be fixed.

And for more information on real “risk management” in modern times and additional references to the theory and how to read the charts and tables, please see our Post, The RiskWerk Company Glossary and “(P&I) Dividend Risk and Dividend Yield“, and our recent Posts “(P&I) The Profit Box” and “(P&I) The Process – In The Beginning“; and 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, such as “(B)(N) TLM Talisman Energy Incorporated” or “(B)(N) ATHN AthenaHealth Incorporated” or “(B)(N) PETM PetSmart Incorporated“, to name just a few.

And 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 on what risk averse investing has done for us this year, please see our recent Posts on “(P&I) The Easy (EC) Theory of the Capital Markets” or “(B)(N) The Easy (EC) Theory of the S&P 500“, and the past, 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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