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Running To Win In All Equities Markets Edjul2011

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Running To Win In All Equities Markets Edjul2011

  1. 1. “ Running to Win in All Equities Markets“Stock prices are like “bubbles” held aloft by operational profits, cash flow and debt service,earnings and distributions, and every so often that are engaged (liked) or disengaged (not liked)at the price of risk.” - Goetze 2009“The only reason for making a forecast, is to reduce risk. But we already know that the only norisk investing, is at the stock price, SP>SF, the price of risk.” - Goetze 2009“Because we know where we are, we will also know when to buy, when to hold, when to takeprofits, and when to sell.” - Goetze 2009“The “gap” U=SP-SF>0 is an instance of “enduring price arbitrage” and does not depend onthe more common and uninspired micro-arbitrage profits discovered over micro-seconds byoverachieving computers.” - Goetze 2009“I never discourage anyone from buying a lottery ticket. I dont know the future, and they mightbe right. But, to win, he or she needs to buy all the tickets. And thats the price of risk (in alottery).” - Goetze 2009Partitioning the DOW 2000 to 2009 – portfolio yielded compounded 29% IRRLadies and Gentlemen, please start your engines! That will sound in a few weeks, but it shouldbe today in the creation of portfolios. Doing the Dow is one thing weve talked about in somedetail in recent editions of CassandraNews. In the rather simple portfolio (there are only thirtystocks, and seven of them are not even of investment grade, in anyones portfolio) that we craftedin the DOW had an IRR (Internal Rate of Return) of 29% per year through the years 2000-2009.In that same period the DOW itself returned essentially, nothing, in fact lost 40% of the moneyinvestors had placed there in their hope of enjoying earnings. Moreover portfolio managerscannot tell us why, markets mumble and stumble! They condition us to buy shares, they do notmake them, mumble, caveat emptor. Not then and still not now can the economists say, either, itseems! Classical, monetarists, medallists, Salty or Freshie, Bastian, Berkeleyian, Austrian orTexan all with their closed macro and micro models of defined terms in separate languages,babel, babel, bust! Munch or Lee, murmel, murmel, they lost my money in ITT?Further, in those nine years, we made only thirteen (13) decisions to run the first and still openportfolio of five stocks (five buys and eight sells, to take or protect profits), and fifty-six (56)decisions to run the closed portfolio (twenty buys and thirty-six sells), all with only one rule.The One Rule: Its in our portfolio only if the stock price, SP>SF, the price of risk, and otherwise not.Page 1 of 7 August 2009 & July 2011 © Copyright StockTakers Limited, All Rights Reserved. Copying Prohibited. The author does not provide investment advice. In order to use reproduce or convey the material herein, in any way, written agreement must be obtained from the author or its agent Architypes Inc. StockTakers Limited is an Alberta corporation providing information on “likeables” equities. StockTakers Limited encourages your seeking tax law advisor for capital gains tax dispositions.
  2. 2. “ Running to Win in All Equities MarketsThe DOW (2000-2009) - And Price of Risk Gives You Odds, 2.34:0.98 To Win.So using our analysis for risk price (SF) we created the Zero To Hero portfolio running on theDJIA 2000 to 2009. In those nine years, we made only thirteen (13) decisions to run the first andstill open portfolio of five stocks (five buys and eight sells, to take or protect profits), and fifty-six (56) decisions to run the closed portfolio (twenty buys and thirty-six sells), all with only onerule.The One Rule: Its in our portfolio only if the stock price, SP>SF, the price of risk, and otherwise not.Page 2 of 7 August 2009 & July 2011 © Copyright StockTakers Limited, All Rights Reserved. Copying Prohibited. The author does not provide investment advice. In order to use reproduce or convey the material herein, in any way, written agreement must be obtained from the author or its agent Architypes Inc. StockTakers Limited is an Alberta corporation providing information on “likeables” equities. StockTakers Limited encourages your seeking tax law advisor for capital gains tax dispositions.
  3. 3. “ Running to Win in All Equities MarketsThe Zero To Hero PortfolioThe One Rule: Its in our portfolio if, and only if, the stock price, SP>SF, the price of risk, and otherwise not.The price of risk (SF) is an extension to the equity market (of cash and stocks) of the Tobin“Separation Theorem”1 which deals with investments in cash and bonds. The price of risk is also“the least stock price at which a company is likeable”2 and thats a theorem and the only thingthat we know – or anybody knows – about stock prices is that the “price of risk”, defined inabsentia3 in the Capital Assets Pricing Model (CAPM) of Sharpe and Markowitz, is “the leaststock price at which a company is likeable”.Moreover, the portfolio manager always has lots of time to consider these decisions. Companiesthat are in the portfolio above the price of risk, are typically in the portfolio for a long period oftime, such as six months, fifteen months, two years, or more. Theres no reason that a portfoliomanager should ever be “surprised”4.No surprise, then, that whats true in the Dow, about stock prices and the price of risk, is also truein the NASDAQ 100. Its a theorem, after all.The DOW (2000-2009) - And Price of Risk Gives You Odds, 2.34:0.98 To Win.The NASDAQ 100 (2000-2009) - And Price of Risk5 Gives You Odds, 2.57:1.03 To Win.Page 3 of 7 August 2009 & July 2011 © Copyright StockTakers Limited, All Rights Reserved. Copying Prohibited. The author does not provide investment advice. In order to use reproduce or convey the material herein, in any way, written agreement must be obtained from the author or its agent Architypes Inc. StockTakers Limited is an Alberta corporation providing information on “likeables” equities. StockTakers Limited encourages your seeking tax law advisor for capital gains tax dispositions.
  4. 4. “ Running to Win in All Equities MarketsAppendix: X-axis ScaleSince were having so much fun, the Price Change Volatility Range [-0.5,1.0] is on the y-axis, and, Ican tell you about the x-axis. The Range [-0.5,1.0] or Range [-1.0,0.5] for each Price Risk Region,SP>SF and SP<SF, respectively, is on the y-axis and simply represents the log-returns observedin each quarter, in each Price Risk Region.The x-axis is scaled as -½ logab = -½ log(b)/log(a), where “b” is the logarithm of the product ofall the positive returns (SP/SP1, SP>SP1) in any quarter (and the product is therefore greaterthan one), and “a” is the logarithm of the product of all the negative returns (SP/SP1, SP<SP1) inthe same quarter (and the product is therefore less than one). The “scale factor” (f=1/2, in thisexample), can be used to compress or expand the scale on the x-axis to provide a “spectralanalysis” of the results, locating the “centre of mass” of the price changes, in terms of risk anduncertainty.Each company is coloured by a different “thread” that joins through (using a cubic spline) all thelog-returns that we obtain for that company in each Price Risk Region and the x-axis scale tendsPage 4 of 7 August 2009 & July 2011 © Copyright StockTakers Limited, All Rights Reserved. Copying Prohibited. The author does not provide investment advice. In order to use reproduce or convey the material herein, in any way, written agreement must be obtained from the author or its agent Architypes Inc. StockTakers Limited is an Alberta corporation providing information on “likeables” equities. StockTakers Limited encourages your seeking tax law advisor for capital gains tax dispositions.
  5. 5. “ Running to Win in All Equities Marketsto allocate “gainers” to the right, and “losers” to the left, using the distribution that is developedin the region, by the data.We notice that there tend to be more gainers in the “high-priced” low risk tolerance region, thestock price, SP>SF, the price of risk, and that “gainers” and “losers” are more or less equallydistributed in the “low-priced” high risk tolerance region, SP<SF. There also tends to be moreand better investment opportunities in the “high-priced” low risk tolerance region, whereas thehigh risk tolerance region appears to be a “traders delight”, and rife with sure profits only inmicro-arbitrage, agency, and transaction costs.The NASDAQ 100 (2000-2009) The Spectrum of Risk and UncertaintyThe S&P 500 (2000-2009) And Price of Risk Gives You Odds, 2.06:1.10 To WinThe S&P - TSX (2000-2009) And Price of Risk Gives You Odds, 2..04:1.01 To WinPage 5 of 7 August 2009 & July 2011 © Copyright StockTakers Limited, All Rights Reserved. Copying Prohibited. The author does not provide investment advice. In order to use reproduce or convey the material herein, in any way, written agreement must be obtained from the author or its agent Architypes Inc. StockTakers Limited is an Alberta corporation providing information on “likeables” equities. StockTakers Limited encourages your seeking tax law advisor for capital gains tax dispositions.
  6. 6. “ Running to Win in All Equities MarketsThese results – and the margin of risk is never less than 2:1 in any of the major North Americanmarkets that we have studied – have profound implications for mutual fund and pension fundmanagers.Implications for Mutual Fund and Pension Fund Managers. 1. An investor, who knows the price of risk, can do it himself or herself, and understand his or her portfolio, and also yours. 2. A portfolio manager, who doesnt know the price of risk, doesnt know anything about the stock price. “Good intentions”, “market savvy”, and forty years of doing the same thing, count for nothing in these markets. One needs to know where we are.Page 6 of 7 August 2009 & July 2011 © Copyright StockTakers Limited, All Rights Reserved. Copying Prohibited. The author does not provide investment advice. In order to use reproduce or convey the material herein, in any way, written agreement must be obtained from the author or its agent Architypes Inc. StockTakers Limited is an Alberta corporation providing information on “likeables” equities. StockTakers Limited encourages your seeking tax law advisor for capital gains tax dispositions.
  7. 7. “ Running to Win in All Equities Markets 3. A “Growth Fund” buys and sells stocks that dont pay dividends. Thats all that one can say if one doesnt know the price of risk. One cant even call it an “investment” and especially not, an “investment that favours capital growth by capital gains” if one does not know the price of risk. 4. A mutual or pension fund that has stocks in both the low risk tolerance region, and the high risk tolerance region, doesnt know what its doing if it doesnt know the price of risk. Ask your broker, whats the price of risk? And how is it dealt with? 5. A fund cannot be said to “protect” or “preserve” capital, or to be “conservative”, if it does not know the price of risk, and cannot calculate the downside exposure i.e. the “gap” U=SP-SF>0. 6. An “Income Fund” buys and sells cash, bonds, and dividend paying stocks. It cannot be said to protect or preserve capital unless the manager can state the downside risk of the capital exposure, and has made a provision to protect it.Our reasons for having any equity in our portfolios are clear, concise and reliable. The equitieswe hold are “likeables” tending to gain 67% of the time. We respond to stock price movements,by our knowing the price of risk, and buying and holding accordingly. That is our theory worksin obtaining 29% IRR. Of course we require a fee for doing that. Mail us for our help.Ernst and Hans Goetze,Architypes Inc and StockTakers LimitedHead Office76 Midridge Close SE 7 Balsam Avenue 351 Chemin BoulangerCalgary, AB Toronto, ON Sutton, PQT2X 1G1 M4E 3B3 J0E 2K0 450 538-12701 James Tobin, Liquidity Preference as Behavior Towards Risk, Review of Economic Studies, 1958, and William F. Sharpe,Capital Asset Prices with and without negative holdings, The Nobel Foundation, 1990, and Harry M. Markowitz, PortfolioSelection, Journal of Finance, 1952. This work is further informed by Verne H. Atrill, How All Economies Work, Principles andApplications of Objective Economics, 1979, and Ronald H. Coase, The Firm, the Market and the Law, U of Chicago Press, 1990,and James Tobin, Money and Finance in the Macro-Economic Process, The Nobel Foundation, 1981. This work is otherwise anoriginal and unpublished work of the author.2 E. Goetze, The Price of Risk and Enduring Price Arbitrage in the Capital Markets, 2009. Available from the author.3 Its well-known that the “market price of risk” cannot be calculated within the equity markets only.4 Bloomberg – August 6, 2009 - “I’m surprised they’d do it this early,” Brian McGill, senior analyst at Janney Montgomery ScottLLC in Philadelphia, said of Hyatt’s timing. “While hotel stocks have performed well these last two or three weeks, investorswill be sceptical of the industry’s fundamentals.”, or “It makes me angry, but it also throws up a lot of question marks,” said IanNakamoto, director of research at MacDougall MacDougall & MacTier Inc., which manages about $3 billion, including Manulifeand Sun Life. “This is definitely out of left field.” (regarding Manulife which cut its dividend by 50% even after promising that itwouldnt have to).5 The Range[-0.5,1.0] is on the y-axis. The x-axis is scaled as -½ logab = -½ log(b)/log(a) where b is the logarithm of the productof all the positive returns (SP/SP1, SP>SP1) in any quarter (and is therefore greater than one), and a is the logarithm of theproduct of all the negative returns (SP/SP1, SP<SP1) in the same quarter (and is therefore less than one). The same scalecalculation is used in the Dow charts (with respect to those data).Page 7 of 7 August 2009 & July 2011 © Copyright StockTakers Limited, All Rights Reserved. Copying Prohibited. The author does not provide investment advice. In order to use reproduce or convey the material herein, in any way, written agreement must be obtained from the author or its agent Architypes Inc. StockTakers Limited is an Alberta corporation providing information on “likeables” equities. StockTakers Limited encourages your seeking tax law advisor for capital gains tax dispositions.

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