Tag Archives: contests

Investing 101: Selection — Know Your Odds For Profit, Payoff Prospect, Commitment Time

Summary Illustration: Domino’s Pizza now: 91 of 100, +10.2%, 2 months; actual CAGR of +82% based on 194 prior days’ experiences when market professionals had outlooks like they have presently. Why know these dimensions? Answer: To make intelligent choice comparisons. Choices to buy, to sell, to hold. Comparison: Apple, Inc.: Odds — 82 of 100, Payoffs +13.8%, holdings 3 months, actual CAGR of +43%, based on 147 prior days’ outlooks in the last 5-years. Another Comparison: Exxon Mobil: 51 of 100, +9.3%, 3 months, actual CAGR of +3%, based on prior similar outlooks in 162 days’ of the last 5 years. Market professionals make these forecasts for their own use, not for publication. They typically get 7-figure annual compensations for making multiples of that pay in profits for their employers. I’m a long-term investor. Why such short-term commitments? Because every long term is made up of a succession of shorter terms. If you mentally lock yourself into a buy and hold, long term commitment, you will pay the price in terms of a lower score of accomplishment. That score is kept in terms of what your capital (including interim income) is worth when you need to start cashing it out for planned (even perhaps unplanned) uses. The proper yardstick is CAGR, compound annual growth rate, and the most important (powerful) element in that equation is time. The three stocks illustrated, Domino’s (NYSE: DPZ ), ExxonMobil (NYSE: XOM ) and Apple (NASDAQ: AAPL ), above are not bad stocks, but they each have had bad times to own them. A “till-death-do-we-part” strategy guarantees seeing the bad times eat up a lot of the good ones. All three have current outlooks of more than 9% gains in 3 months or less. That’s over +40% when compounded in a year. But XOM’s actual experiences have only been profitable 51% of the time, a coin-flip. The net result: a +3% CAGR from forecasts by knowledgeable, experienced folks. A whole community of them. Appearances can be deceiving. We are all human, subject to error, even the best of us. So what intelligent investors do is learn from the mistakes, keeping their costs as small as possible. But an even worse mistake is by being so fearful of not making mistakes that our learning curve is a flatline. Because it denies the investor of substantial net gains that courage could earn. The learning process What is essential in the process is being able to make comparisons between investment candidates. The place to start is with what is already being held. Every occasion a decision may be made to re-allocate capital (and time) to a different investment, what is being held now should be in the contest between candidates. To make it a fair (most productive) contest, there needs to be comparable scorecards for each one of the combatants. Some preliminary research needs to be done to generate the same elements of the comparable scorecards. Forget about pitting abstract notions of what technology will do for AAPL compared to DPZ, or what consumer attitudes will do for XOM compared to AAPL, or what world energy demands will do for or to DPZ. Like it or not, what will matter for each of these stocks, in terms that can be directly measured with the others, is their market prices, now and where they may be in the future. You or I may have earned through experience special hidden advantages of insight into one or another of the candidates. For the contest results to have their best chance of providing a desirable outcome, the knowledge base should be as equal as possible. But it is unlikely that, in the time remaining before when a decision needs to be made, similar comparable insights can be developed by us for the other-issue contestants. All that requires is to have, say 30,000 folks working for you (as Goldman Sachs does) on a 24-hour world-wide basis, relentlessly 7 days a week, gathering information about what the contest subjects – and their local & distant competitors – are doing, how it is being received by customers, what revenues and costs are involved, how technology is evolving, and how international political influences are likely to impact the interrelated scenes. Also importantly, how it is all being appraised by folks with the investment muscle of available capital to push prices up and down. Have you got that? Few do. The investing organizations that do have it engage in a continuing, very serious game, each doing their best to claim control over a larger share of the pie than they had before. The sly ones don’t get into a fight over the pie slices, but participate by waiting on table, helping to serve up, and by making side bets on the pie-fight’s outcomes, all for an immodest fee, charged to and paid by the other players in the game. That describes the role of market-makers [MMs], who facilitate the transacting of market-disrupting big-volume block trade orders necessary for $-Billion fund managers to make significant changes in their holdings. Some of the MMs provide temporary at-risk capital to allow trades to occur by balancing buyers with sellers. Others provide hedging and arbitrage skills to help the capital-providing MMs avoid the temporary risks taken. The side bets reveal what the players think can really happen to prices. They are set in different, highly-leveraged competitive markets of derivative contracts, where, equally well-informed, sophisticated speculative buyers and sellers fight it out. We just translate their bet actions into price range forecasts. See what has happened to our 3 current examples Figure 1 pictures how once-a-week examples of daily forecasts for AAPL have been implied by those bets during the past 2 years. Figure 1 (used with permission) Each of those vertical lines in Figure 1 are representations of the range of AAPL prices that was believed could occur in coming days. This is a picture of looking forward in time at what may be coming, not a “technical analysis” of past price history. These are forecasts made in “real time” as dated, before the subsequent events came to pass. Please note how so many of those range tops have subsequently been achieved by the heavy dot in each range that identifies the market quote at the time of the forecast. And note the progress of both upper and lower limits of the ranges. Declines in AAPL price often occur when the downside portion of the forecast range grows. That may be better seen in the picture of daily forecasts over the past 6 months in Figure 2. Figure 2 (used with permission) Beneath the picture in Figure 2 is a row of data spelling out the day’s forecast price range and the upside price change implied between the current price and the high of the forecast. That Range Index [RI] number tells what portion of the whole forecast price range is between the current market quote and the bottom of the forecast. Today’s is 20, meaning that about four times as much upside price change is in prospect as is downside. The RI tells how cheap or expensive today’s market quote is, compared to its expectations. The small blue picture shows how those daily RI measures have been distributed over the past 5 years. The other items in that data row are what happened subsequent to the forecast, had a buy of the stock occurred at the next day’s close, when the position was managed under a simple, standard strategy. These are the numbers cited for AAPL in the bullet point at the start of this article. Days held are market days, 21 a calendar month, 252 a year. The last item, the Credible Ratio matches the achieved historical payoffs of +7.4% with the forecast implication of +13.8%. The 43% CAGR is a calculation of the +7.4% accomplishments, not a forecast. What else goes on in the real investment world is a recognition that stock prices often go down on their way to an upside target. The -5.5% drawdown exposure is an average of the worst-case price experiences following the 147 prior instances of a 20 Range Index in the last 1261-day 5 years. They represent the point when an investor is most likely to become discouraged about his/her commitment in this stock decision. It is the real risk of mistakenly locking in a bad loss here, rather than choosing to tough it out to gain a profit averaging +7.4%. The Win Odds tell that not making the big loss decision was the right thing to do 82% of the time. This review of AAPL experiences from prior current-proportion (20 RI) forecasts lays out many qualitative aspects of an equity-choice decision that only the investor himself/herself has the right to make. To further illustrate those decision points, here are current-day pictures and associated historical data rows for DPZ (Figure 3) and XOM (Figure 4). Figure 3 (Used with permission) Figure 4 (used with permission) In all of these examples there is plenty of actual sample experience to measure. While there is no guarantee that future market outcomes will follow what has happened in the past, there is little likelihood that any of what is illustrated is a freak chance occurrence rarely to be repeated. And since repetition and habit are in human nature, having drawn these samples from multi-year periods on the basis of forecasts similar to the present, the chances ought to be better than average that they may be representative. Besides, in addition to your own judgment, do you have better evidences as a guide? So think about incorporating these notions into how you prefer making selections, ones to be comforting companions in your investing journey. DPZ makes a reasonable (0.9 cred ratio) +10% gain with 9 out of 10 chances of bringing it off, perhaps in some 7 weeks at a nearly +9% achievement. That would let you put the same (enlarged) capital to work again another 6 or more times in a year. Previously that has produced (including that tenth miscarriage) a rate of gain of over 80%, if a similar set of prospects can be found in other equities on a timely basis. Some 2500 stocks and ETFs are being appraised daily, and these kinds of gain prospects, profitability odds, and holding periods frequently appear. They offer a wide range of choices. In a different selection, AAPL offers nearly +14% upside instead of +9%, and what’s happening in technology may be lots more fun and interesting than what’s happening on the couch in front of a TV’d football game. Life is more than just making money. And what if, when XOM’s principal revenue stream was cut in half with crude prices going from over $100 down to $40, that has got everyone convinced that there’s not going to be a meaningful recovery above $50? But if it happens? The credibility of today’s forecast (maybe for opposite reasons) is quite low. Summer of 2014 saw market pros behaving as though XOM’s price could go above $110, and now they only see a recovery to less than $90 from $81. Wow, they think now the price could plummet all the $3 way from here to $78. Times change, so could expectations. These are just a few illustrations (not recommendations) of the selections constantly available to meet your objectives, your way. Conclusion You ought to compare the odds, the payoffs, the risks, the cost in time requirements and emotional involvement, in light of what has actually been achieved. It’s your capital. That makes it your call. But try to make the calls as satisfying to your desires as possible. To do that intelligently you need to have measures of what is likely to come about in the market, where the real score is kept. Measures that let you compare one choice against others. At times when it best suits you. Those comparisons can be made often and effectively, if you have the right kind of measures. And with good measures you can learn from your mistakes and minimize them. The advantage comes from being able to measure alternatives with standard scales common to all, re-measuring as frequently as makes sense in your circumstances. (For most of us, not daily or weekly.) Be an active investor, continually reappraising your future prospects, the ones you are creating by your choices. How they may be managed will be discussed in Investing 102 — portfolio management.

401(k) Fund Spotlight: Janus Triton

Summary Janus Triton is a small to mid capitalization growth stock fund. Triton has consistently beaten the Russell small capitalization growth indexes, but not the higher quality S&P 600 Small Cap indexes. Triton is overweight the technology sector, which comprises about 31% of the fund. A look at some of the fund’s largest technology holdings reveal the manager is true to the fund’s promise of investing in companies with “differentiated business models”. Introduction I select funds on behalf of my investment advisory clients in many different defined contribution plans, namely 401(k)s and 403(b)s. I have looked at a lot of different funds over the years. 401(k) Fund Spotlight is an article series that focuses on one particular fund at a time that is widely offered to Americans in their 401(k) plans. 401(k)s are now the foundational retirement savings vehicle for many Americans. They should be maximized to the fullest extent. A detailed understanding of fund options is a worthwhile endeavor. To get the most out of this article, it is helpful to understand my approach to investing in 401(k)s . I strive to write these articles for the benefit of the novice and professional. Please comment if you have a question. I always try to give substantive responses. Janus Triton Fund The Janus Triton Fund has the following share classes: I will assume the “T” shares for this article, since that is the share class that holds the most assets of the fund. It is also the primary share class used by Janus to evaluate historical calendar year returns. The net expense ratio for the T shares is .93. Evaluating Historical Performance Triton is a small/mid capitalization (“cap”) growth fund. Janus compares the fund’s historical performance to the Russell 2000® Growth Index and the Russell 2500™ Growth Index and it comes out favorably, as shown on the following table: as of September 30, 2015 1 Year 3 Year 5 Year 10 Year Janus Triton – T Shares 5.1% 14.2% 14.1% 11.4% Russell 2500™ Growth Index 3.4% 13.8% 13.9% 8.4% Triton Outperformance (Underperformance) 1.7% .4% .2% 3.0% Russell 2000® Growth Index 4.0% 12.9% 13.3% 7.7% Triton Outperformance (Underperformance) 1.1% 1.3% .8% 3.7% Triton has outperformed both growth benchmarks over all four of these time periods. Most notably, Triton’s outperformance in the important (for long term investors at least) 10-year category ranged from 3.0% to 3.7%. This particular 10-year period is also noteworthy, because it included one of the worst bear markets in U.S. stock market history. However, taking a step back, it is important to ask the question: “Are the Russell indexes the best for comparison?” Perhaps they are if your fund is always outperforming them. There are other widely used small cap indexes from S&P that have outperformed the Russell small cap indexes over time. (This article explains the difference between the two.) The S&P Small 600 Index tends to hold a bit higher quality stocks. For example, it requires index members to have at least four consecutive quarters of positive earnings. I drew up a chart of Triton versus the SPDR S&P Small Cap 600 Index ETF (NYSEARCA: SLY ) and the SPDR S&P Small Cap Growth Index ETF (NYSEARCA: SLYG ) since March 1, 2009 (arguably the approximate date of the current secular bull market). Here is what it looks like: JATTX Total Return Price data by YCharts A:JGMAX C:JGMCX I:JSMGX N:JGMNX S:JGMIX R:JGMRX T:JATTX Out of the three, the SPDR S&P Small Cap 600 Growth Index ETF was the winner, but only slightly. Overall, I think it could be said that all three have pretty much been running neck and neck throughout this bull market. According to Barrons , Triton has outperformed 89% of its peers, as measured by the Lipper Small Cap Growth Index, over the last five years. I think the fact that it beat such a large percentage of its peers, but still trailed the S&P Small Cap 600 Growth Index ETF during this bull market, really speaks to the quality of the S&P Small Cap 600 indexes. Overall, the fund has a solid performance track record. If available in a 401(k), I would likely choose either of the similar S&P Small Cap 600 Indexes though instead. The index gives you a lower expense ratio, so you have a slight advantage right out of the gate. Triton, like so many other mutual funds, is so widely diversified that it really cannot stray to far from the index as long as it remains fully invested. The problem is not so much that the fund holds 120 different stocks, it is that there are only four stocks that comprise more than 2% of the fund each. Other Noteworthy Tidbits Triton does have a substantially overweight position in information technology (31% of the fund as of October 31, 2015) compared to the Russell 2500 ™ Growth Index’s (21%). The fund may present a good angle for investors interested in having more exposure to the sector without going overboard. However, the overall fund has a forward Price to Earnings (“P/E”) multiple of 24, which is very high. I suspect that some of the information technology stocks it holds are widely overvalued. Let us dig a little deeper. The industries the fund has most exposure to are Software (12% of fund) and Information Technology Services (9%). The following table lists the fund’s largest holdings within these two sectors and their trailing twelve month (“TTM”) and forward looking P/E multiples (taken from Yahoo! Finance). Company P/E Multiple (Last 12 Months) Forward P/E Multiple SS&C Technologies Holdings ( SSNC ) 98 22 BlackBaud ( BLKB ) 121 36 Cadence Design Systems ( CDNS ) 30 19 Euronet Worldwide ( EEFT ) 44 22 Broadridge Financial Solutions ( BR ) 24 18 Jack Henry & Associates ( JKHY ) 30 26 I tend to focus on forward looking multiples and most of these are too high for my liking, although I was a bit off on my speculation of wild overvaluation. They are not in the extreme territory of some overplayed growth stocks. Janus states in the Triton fund description that: “The Fund invests in small-cap companies with differentiated business models and sustainable competitive advantages that are positioned to grow market share regardless of economic conditions.” Glancing at the business descriptions of just these six companies leads me to believe that Triton’s manager is following through on this promise. These companies strike me as those that are not going away anytime soon and could continue to experience solid growth in their niches (e.g., payment processing for small financial institutions and designing web solutions for non-profits). Conclusion The Janus Triton Fund is a solid option for 401(k) investors looking to get exposure to small/mid cap growth stocks. I would not choose the fund over the S&P Small Cap 600 Growth Index, but that is rarely a choice. Triton has consistently beaten the comparable Russell growth indexes and most of its peers. I would likely choose it, or at least give it a higher allocation, than other such available options. Investing Disclosure 401(k) Spotlight articles focus on the specific attributes of mutual funds that are widely available to Americans within employer provided defined contribution plans. Fund recommendations are general in nature and not geared towards any specific reader. Fund positioning should be considered as part of a comprehensive asset allocation strategy, based upon the financial situation, investment objectives, and particular needs of the investor. Readers are encouraged to obtain experienced, professional advice. Important Regulatory Disclosures I am a Registered Investment Advisor in the State of Pennsylvania. I screen electronic communications from prospective clients in other states to ensure that I do not communicate directly with any prospect in another state where I have not met the registration requirements or do not have an applicable exemption. Positive comments made regarding this article should not be construed by readers to be an endorsement of my abilities to act as an investment adviser.

Chasing Beta Outside The U.S

Summary According to famous value investor Murray Stahl, beta is out of favor. The contrarian play is to seek out beta. The Powershares S&P Intl Dev Hi Beta ETF is one way to go long beta outside the U.S. Examination of its valuation and contents show how contrarian this bet really is and whether there is value. In his latest investment commentary , famous investor Murray Stahl says investors are now en masse shunning beta in favor of stability. This influx of funds into ETFs with stable prices further helps this category to stabilize. This powers a virtuous cycle that has led to large inflows to so-called low-volatility products or low-beta products. The contrarian thing to do is to go high beta. I don’t think it is a coincidence I’m finding lots of bargains among companies with highly volatile earnings patterns. The contrarian idea can be played through ETFs very easily and one option is the PowerShares S&P Intl Dev Hi Beta ETF (NYSEARCA: IDHB ). IDHB data by YCharts What is beta? Beta shows you the level of volatility in asset prices compared to a benchmark. The baseline volatility is that of the benchmark and it is equal to 1. Assets exhibiting more volatile prices have a beta above 1 and assets with more stable pricing profiles have betas below 1. It is all about movement and it doesn’t matter in which direction it goes. Portfolio Holding high-beta stocks isn’t easy. At times it requires nerves of steel. Often they are highly levered, as leverage amplifies underlying developments for better or for worse. This particular ETF is focused on developed markets ex-U.S. and ex-South Korea and within those markets targets specifically the 200 stocks with the highest beta over the past 12 months. Generally stocks with float under $100 million or less than $50 million of annual trading volume are excluded. So how does such a portfolio look in practice? Well, its top 10 holdings are: Penn West Petroleum (NYSE: PWE ), Alibaba Health Information Technology ( OTC:ALBHF ), Canadian Oil Sands ( OTCQX:COSWF ), Meg Energy Corp. ( OTCPK:MEGEF ), Det Norske Oljeselskap ASA ( OTCPK:DETNF ), Tullow Oil PLC ( OTCPK:TUWOY ) ( OTCPK:TUWLF ), Nokian Tyres PLC ( OTCPK:NKRKY ) ( OTC:NKRKF ), Raiffeisen Bank International AG ( OTC:RAIFF ) ( OTCPK:RAIFY ), Hargreaves Lansdown PLC ( OTCPK:HRGLF ) ( OTCPK:HRGLY ) and DNO ASA ( OTCPK:DTNOF ) ( OTCPK:DTNOF ). Most of the portfolio companies have large or medium market caps. Together these categories make up 68% of the portfolio. On average, the companies have one-third the market cap of the benchmark constituents, so on this front there is a clear discrepancy between the two. It makes sense that prices of small caps are somewhat more volatile, as their earnings are more profoundly impacted by a subset of real-world events. Financial services is the largest sector taking up 24% of the portfolio. This is 9% below the benchmark weighting. The ETF allocated 21.55% of its funds to the energy space, which is double that of its benchmark. A recovery in oil would definitely not hurt this ETF’s performance. One last important sector is basic materials at 14.39%. Another sizeable bet that is different from the benchmark. From a geographic diversification perspective, the ETF disappoints because 83% of the money is bet on companies in continental Europe and another 16% on companies in the U.K. In summary, this ETF is a short cut to bet on Europe / Energy and Leverage. Sounds good, doesn’t it? Valuation The concept of overweighing Europe / Energy and Leverage does not really excite me either, but looking at the ETF from a valuation perspective, it starts to look quite a bit more attractive. It doesn’t score well on forward earnings, but beats the benchmark easily on a present price/cash flow basis. It is also much more attractive on a price/sales basis and offers a slightly higher dividend yield. PowerShares S&P Intl Dev HI Beta ETF MSCI ACWI Ex USA Value NR USD Price/Forward Earnings 14.03 12.56 Price/Book 0.86 1.13 Price/Sales 0.56 0.82 Price/Cash Flow 3.49 4.02 Dividend Yield % 4.9 4.45 Data: morningstar Expenses The ETF’s expense ratio is about 0.35%, but Invesco agreed to waive 0.10% of fees until 2016. Probably in an attempt to increase the assets under management. The expenses are modest, especially considering it invests in mostly foreign issues. Bottom line Even if the contrarian play of going long beta but the idea of going long this ETF does not it is still a useful starting point for further research. Beta is a decidedly backward-looking way of evaluating stocks. If you can dig up companies that experienced high volatility in the past twelve months but where it’s smooth sailing from here on out and buy them at low price/cash flow multiples, you are doing great even if beta stays out of favor. For the brave and lazy, this ETF can serve as an all-in buffet. Editor’s Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.