Should Apple Investors Time The Market?
Summary You’re not always dumber, or unluckier, than every other investor. Neither am I nor any other group, manager, or fund. The irregularity of market prices makes it a near certainty that we all get fooled from time to time. Remember, someone else is on the opposite side of each trade. Odds of making profitable investments, along with their rate of gains, net of losses, is what counts. One target is above market averages. Another is above your goals; that’s success. Look at Apple as an example, over the past 5 years. Can it be timed? Does it need to be? Only your goals may answer that question. Let’s be real careful about measuring results. That means preventing the cherry-picking of favorable time periods to start and end with. If we look at every day as a start, and every day as an end, that problem is largely resolved. Largely, but not entirely. The holding-period that may be involved needs to be considered, as well. And the measurement units and manner of calculation matter. When it comes to combining gains and losses in one or more holding periods, you probably are aware (hopefully not from direct experience) that a 50% gain after a 50% loss does not return an investment to its starting point. That is why geometric mean averaging must be used to resolve the computational problem properly, rather than simple arithmetic summation and averaging. The holding period problem is resolved by calculating Compound Annual Growth Rates (CAGR). What the CAGR does is to find the average growth in each unit of the holding period, and then restate those holding period “grains” into a standard 1-year whole “loaf” of performance. Because each unit grain is represented by 1+the unit’s change, those pieces can be properly reassembled into a geometric mean. The CAGR of a 3-year, 4-month, and 5-day holding period (for example) measured by its beginning and ending points, will produce the same result as a series of those 3 years, 4 months, and 5 days of single day changes geometrically compounded day by day. Then when each are annualized by taking the 1/(number of days) root of that compounding, and raising it to its 365th power, minus 1, they will show the same CAGR. So if we took the CAGRs of 13-week periods (just for example) starting daily for 9 months, we should have a near-perfect measure of the annual rate of change for the data being examined during that year. Our Example of Apple We have a computer program tool that does exactly that kind of measuring. It was written originally over 40 years ago, back when the same kinds of measurements of stock performance were also needed. Figure 1 shows the result of it being applied to the last 5 years of stock price data for Apple (NASDAQ: AAPL ). Figure 1 (click to enlarge) It uses the daily closing prices of AAPL from 11/3/10 to 11/4/15, all 1261 of them to perform CAGR price-change measurements in progressively longer holding periods of from one week (5 market days) to 16 weeks of 80 market days, indicated by the yellow column footers. The average CAGRs during the whole 5 years are shown in the blue row marked at left by the RWD:RSK cryptic ratio title of 1 : 1. It contains all 1256 starting days possible to compute the 5-day holding periods averaged in the first data column, of 22 (%). Each column in that row contains 5 fewer days of CAGRs of 5-day longer holding periods than the column to its left, out to 1176 (count not shown) examples of 80-day long periods. It is a fair conclusion to reach that AAPL stock’s average annual rate of growth during the past 5 years has been 21% ~ 22%. Our last bullet-point question in the introduction to this article above may have its answer in this blue row of Figure 1 data. If the investor’s personal objective of investing in AAPL is to outperform the market, timing the purchase and sale of AAPL stock seems not to be necessary. On the other hand, if the investor’s goal is to compete successfully with the most productive equity investment managers, a 22% rate of gain might be inadequate. If so, the other question of “Can AAPL be timed?” may be worth exploring. What evidence exists of successful AAPL timing? That evidence exists in the upper rows of Figure 1. They contain the CAGRs of those days following forecasts that are implied by the hedging actions of the market-making (“MM”) community. Actions as they sought to protect their own firm capital that was necessary to be put at risk temporarily while helping big-dollar fund-clients adjust their portfolio holdings of AAPL. Those implied forecasts contained price ranges believed possible to be encountered during the time following the volume (block) trade that necessitated each capital risk exposure and its protection. A time necessary (up to a few months) to unwind the derivatives contracts involved in providing the hedge protections. The MM beliefs producing the price ranges of the forecasts are the products of well-informed depth research of publicly-known fundamental economic, competitive, and political surroundings, plus possible advantages of personal and professional contacts among industry and corporate sources. Plus appraisals of current market influences from other interested investors seen by “order flow” among the community of market-making professionals. The price range forecasts, split by the market quote at the time of the trade, provide an upside-to-downside price change potential balance of reward-to-risk proportions. That changes from day to day. The extent of its imbalance is indicated in the upper row RWD:RSK captions and the frequency of its presence, (or more extreme) is shown in the column headed #BUYS. Pure logic suggests that there should be no days where buyers might be found during periods where knowledgeable appraisals indicated larger downsides than upsides. But it does exist, perhaps due to less well-reasoned appraisals among the public than among the market pros. But during this 5-year period that has not happened. Instead, there have been 47 days that prompted professional analysis suggesting practically no downside price change prospect for a buyer of AAPL. Those 47 days were followed by periods of up to 80 days in which the subsequent price of AAPL stock rose at rates of as much as CAGRs of 70%. Another 18 days joined that 47 where AAPL price drawdowns from the forecast-day quotes were seen to be a trivial 1/50th as large as the upside prospect. Combined, those 65 days averaged CAGRs of as much as 60% or more. Should timing be tried? Now, is this enough of an incentive to attempt the timing of AAPL purchases? The excess returns above the blue-row average are +40% to +50% rates above the usual AAPL gains. And they have occurred in about 5% of the days – one out of every 20. With 21 market days a month, that’s almost one a month. But these are overall averages among the 65 days. How good are the odds of hitting a winner? Are there just a few big payoffs involved here? Figure 2 shows what percentage of the 65 produced gains. Figure 2 (click to enlarge) Say, not bad! With 7 out of every 8 instances a winner, that looks a lot better than the blue-row average of 2 out of 3. But how bad might that 8th experience be. Could it kill four of the others? Figure 3 addresses that question. Figure 3 (click to enlarge) Whoa! Lose nearly a quarter of my money? No way, Way. Easy does it. This table show the single worst case price drawdown – at any point in the holding period. Figure 2 tells what proportion of all the exposures have recovered from the drawdowns during their periods after the forecast, and those that have not may have recovered some, so their positions at this time of measurement may be a lot better than the worst possible. But you would have to struggle past that -24% worst case, if it recurred during your adventure, and simply being aware that it could happen, even once, no matter when, if that is scare enough, then the answer is no, you shouldn’t try to time AAPL buys. Still, be aware that drawdown (or worse, -30%) could have happened any time an AAPL buy might have been held as long as 65 market days (13 weeks, or 3 months). And you would have had to live through that. Maybe you did, like a lot of folks. At least 2/3rds of them, maybe 7 out of 10, are back in the win column. There’s a reason that AAPL is the biggest market cap in the game. Conclusion With good guidance many stocks can be effectively timed, in comparison with simply buying and holding them. Even good growers like AAPL. In fact few stocks have 5-year records of over +20% CAGRs. Those with slow growth, high dividend yields (4-6%) often have price ranges each year that are in the 50% to 100% low to high experience. One adequately-timed purchase and subsequent sale often can result in a year’s payoff that is double or even triple what the buy & hold year would produce. But it requires a mind-set that can accommodate the awareness and presence of temporary price risks. That is more than many investors can stand, and they are limited to single-to-low-double-digit returns from their investments. With adequate capital resources, that may be all they need, and so they are fortunate. The failure of market averages to show much of any growth over the past 15 years suggests that there are many passive market index investors not so fortunate, losing all that time, with little to show for it.