(B)(N) What’s A Girl To Do?

Figure 1: The Tao of Stock Prices

Drama. “There are as many reasons for a stock price as there are investors and their money” (The Tao of Stock Prices) but that doesn’t stop analysts, pundits, and even some successful investors from telling us “the” reason that they like it and are “comfortable” with it.

And that’s OK because any reason is likely to work some of the time – just stick with it and hope that it works before our money is gone; please see Figure 1 on the right for more details (and click on it and again to make it larger as required).

Figure 2: The One Stock Pony

The “rational price” at any time is the discounted value of the future income stream of the paid dividends (in cash or stock) and the capital gain when the stock is finally sold but even then, if it’s held long enough the discounted value of the selling price could be taken to be effectively zero and therefore we generally don’t buy and hold stocks for the long term hoping for a capital gain at the end of time or some time, although many investors think that just buying and holding almost any mutual fund will work out for them in the long term and there are some stocks that don’t pay dividends (“growth stocks”) and actually do increase in value over time at a rate that is in excess of the rate of inflation – but that’s the past and the future might not be like the past; please see Figure 2 on the right for examples of these calculations and how they might affect our income.

Look at that! Unbelievable!

Professional managers who are hired to run pension plans, endowment funds, or mutual funds, have generally given-up on running just a handful of select companies in their portfolios (called “alternative methods”) and instead rely on modelling the major indexes with long-term objectives of getting 8% or 10% per year and reducing the volatility of those returns (“Beta” or “Smart Beta”) in order to provide a reliable income; those are “irrational methods” but we don’t expect them to change that behavior nor do we expect them to stop watching TV at home or work.

And a lot of people believe that the stock market is “risky” but that isn’t true either – it’s the investors who are “risky”; please see below.

The Insider Track

Meh!

A recent “screen” for “what’s not to like” went national and consists of just five NYSE stocks that have a market value of more than $10 billion; and which are being bought by the insiders who have recently bought at least 100,000 shares in each of these companies and, they say, they ought to know what they’re doing; and are 50% to 80% held by institutional investors who have a large research staff that is paid to know; and which have traded an average of 1 million shares per day in each of the last 90-days (US News & World Report, April 22, 2015, 5 Stocks Loved By Insiders and Institutions).

We think that it’s “desperate” to buy stocks because other people are buying them and even more desperate to buy stocks because the “insiders” are (type “insiders” in the Search Box on the upper-right for more examples such as “(B)(N) The Insiders” for another random “insider” portfolio and “(B)(N) The New Insiders” for the inside scoop on some pharmas).

Of course, we never know but on balance Meh! to the aggregate dividend yield of 1.1% and a return of earnings of only 18.5% and prices that appear to be “topped-out” so that we might wait for lower prices although all five of these stocks are currently in the (B)-class and they could be bought with the appropriate “price protection” in case the insiders and institutions decide to bail-out after we’ve bought them.

And if they’re trading a million shares a day, that’s $400 million per day that has added only $2.1 billion to the market value since January; please see Exhibit 1 below. Meh!

Exhibit 1: (B)(N) The Insider Track – Risk Price Chart

Figure 1.1: (B)(N) The Insider Track – Risk Price Chart

For more information on the Free Market Yield and the terms that we have used above, please see our Posts “(P&I) The Dismal Equation (Ecclesiastes 9:1)” and “(B)(N) S&P 100 Volatility Risk and The Full Moon” and “(B)(N) NASDAQ 100 Volatility and The Stone Bunnies“ and for an introduction to The Barometer “(B)(N) What’s A Girl To Do” or “(P&I) The Swiss Franc Debacle“.

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 action, La 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 America, Big Oil, Shopping in America or Banking in America, to name just a few.

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*.