(B)(N) PCYC Pharmacyclics Incorporated

Figure 1: While we were out walking.

Dealbook. Nearly 80% of our World Trade portfolio has been trading in the (B)-class for more than half of the time in the last four years and the winner is Pharmacyclics Incorporated – now an AbbVie Company at $21 billion and $261.25 per share which is up +1500% since January 2012 – in other words, a $100,000 bet on Pharmacyclics in January 2012 (instead of a down payment on our house) would have made us millionaires today and we could still buy our house for cash; please see the illustration in Figure 1 above (and click on it and again to make it larger as required).

But that’s an old story and there are many more companies like that – but which ones are they?

We don’t know but if we did, we would surely tell you – it is guaranteed that we would tell you if we knew because all of our profits on Pharmacyclics were in speculative and unearned capital gains and most of those in the last few months when AbbVie stepped-in to close the deal because Pharmacyclics has never paid a dividend and AbbVie paid $21 billion for a company with less than $1 billion in assets and less than $100 million in net revenue last year and no product revenue at all in 2012.

How likely are we to do that again? And what can we do to improve our odds if we’re not pharmacists or doctors but only patients who need to pay for it all?

The answer is “very likely” and we know how to improve our odds of doing it; please see below.

Buying & Holding – The Patient Investor Walking

Buying and holding stocks in the major equity markets is the standard fare for almost all of our pension plans and endowment funds but they tend to hedge their bets in a number of ways such as working the cash and near cash market in government and corporate bonds (60/40 or 40/60) and income-producing “alternatives” because they don’t know how to effectively hedge their “risk” in large portfolios of equities if “volatility” is the only “risk” that concerns them and they have no other insight into “risk” even though “volatility risk” is not an investment risk and they also use “asset allocation” models that overweight or underweight their exposure to industrial sectors (sector rotation) and other equity markets including foreign markets (political and currency risk) that tend to increase their “risk”.

A more common example of solving a difficult problem is “walking” and if we think about how we walk and all of the “systems” of mind, nerves, and muscles that we need to engage for “walking”, we’re going to fall down no matter how bright and well-schooled we are; a bicycle is easier because all we have to do is peddle and look straight ahead and gravity (which we don’t understand but can explain by experiments) does the rest and fish don’t walk at all.

In other words, these investment methods are very impressive (sounding) and they are brave and valiant but they have lost their way unless they say the magic words – we want 100% capital safety guaranteed and 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 or spending our money and not producing an income; moreover (as we noted above), “volatility” is not an investment risk – it is just “volatility” and what we get when we can’t look ahead or be in the right place at the right time.

But the price of an income is always high and that’s what AbbVie bought and the researchers who have been working at it for a lifetime finally got paid but it is especially high in a deflationary economy (let alone a recession or a depression) because there is far more money in the World than there are productive uses for it and other than the practical purposes of growth and enterprise (which feed, house and clothe us, for example), the purpose of growth and enterprise and inflation is to trim down the “money” in the World and replace it with an income.

For example, the World Oil (The Company) portfolio is an example of the pursuit of an income over long periods of time regardless of the markets because we don’t own just one or a few select “oil” companies, we own them all and manage them in the (B)-class to capitalize (so to speak) on volatility (anxiety and uncertainty) and they produce about 5% of the World’s GDP and handle 85% of its oil (and the rest doesn’t matter) and we can expect to double our real money in 50 years while earning a dividend yield of about 4% per year and for even more cash, we “capitalized” +66% of other investor’s money in the last three years (about 20% per year) by merely working the (B)-class portfolio against the “volatility players” who are counting what’s left of  their “money” every day.

Nevertheless, +66% is far shy of +1500% (although there might be nothing hereafter) and we’re wondering about how we might do better without gambling for it but, instead, being always ready for any future.

The Dynamics of the (B)-class Portfolio

World Oil is just one example of immunizing ourselves to volatility and the markets and inflation for an income and the portfolio can be run by an accountant who knows nothing at all about the markets except how to buy and sell stocks and manage the stop/loss.

We don’t especially want to do “World Telephones” or World Potash or Gold or Mining or Pharma, for example, although if we own shares in any one of those types of companies it’s always useful to look at what it means to own shares in all of them because every market has an ecology that is defined by the investors and their money in it; please see our Post “(P&I) Extreme Economics – The Canadian Mines” for another example.

However, since 80% of the World Trade companies traded in the (B)-class for more than half of the time of the last several years, we are motivated to look at the “dynamic” between buy and hold portfolios (such as the (B)-class Exclusive portfolio) and volatility-driven portfolios and whether we can sensibly expose ourselves to unexpected capital gains without the unexpected downside or market surprise that is always laid-on for us and might occur at any time.

And if we knew how to predict it, we would tell you that too and turn it into a self-propelling prophecy called the “investment news” and The Daily Dow (which we don’t read).

The Price of Volatility

What we learned about the dynamics of the (B)-class portfolio is that over 400 companies were always in the (B)-class and their average price return over 43 months was +30% which isn’t much; moreover, there were over 1,000 companies that were sometimes in the (B)-class and at other times in the (N)-class but not always in the (B)-class and their average price return was +48% which still isn’t much but it was better than the strictly (B)-class portfolio of companies that were never in the (N)-class.

Figure 2: The Price of Volatility

But that’s not all.

As we admitted more sometimes (B)-class and sometimes (N)-class companies into our buy and hold (as above) portfolio, the returns improved to +75% for those companies that were in the (B)-class at least half of the time but not all of the time, and the returns collapsed to +2% for those companies that were in the (N)-class for more than half of the time and they became negative (-2%) if that time exceeded 60% of the time.

Please see Figure 2 on the right for a summary of that dynamic which (really) has nothing to do with volatility because these are the average price returns over the entire period of 43 months since December 2011 and we did nothing to “manage” the companies in them except to note whether they were trading in the (B)-class or the (N)-class at the time.

But even that’s not all!

Quite a few of these predominantly (N)-class companies provided both spectacular gains and spectacular losses both of which were more attenuated in both the size of the gains or losses and their number in the (B)-class companies and both of which were unpredictable and so our challenge is to render the unpredictable predictable by managing the (B)-class portfolio with erstwhile (N)-class companies in it; please see Exhibit 1 below for a summary of what’s at stake in the “big picture” (and click on it and again to make it larger as required).

Exhibit 1: The Price of Volatility

Figure 1.1: The Price of Volatility

For more information and examples 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*.