Now, I'm not too sure about successfully timing the popular indices (Dow Jones, S&P 500, etc.), but with individual stocks, in my opinion one can absolutely identify areas where the probabilities to profitably buy and sell are greatly skewed in favor of the conscientious market participant. While this is a fairly complex discussion, let's try to tackle this just one way (out of four or five) how I identify opportunities in individual stocks. Before moving on, one item to keep in mind is that operating in stocks is about probabilities. There are no sure things. When dealing with probabilities, you can observe the exact scenario 10 times and only have the desired outcome 50% of the time. The important question is can you make a healthy profit on the 5 times it works and minimize the losses on the other 5 times it didn't work?
To keep this straight forward, I am going to focus on just one fundamental factor I monitor when choosing to buy or sell shares of a stock. Pictured above is the FAST Graphs charting service to illustrate this one point using the price of Intel. While there are many fundamental factors I look at in selecting securities, earnings is a critical factor. The orange line in the graph above could be deemed fair value for Intel. Now Intel is a semiconductor company, and you can see by the movements in the fair value line, there is quite a bit of cyclicality to this business. Even with this wide variability in earnings, you can observe when the price of the stock (black line) gets above the fair value line (orange line), the price eventually tends to gravitate lower back to fair value and when price drops below the orange line, the price eventually gravitates higher back to fair value.
For the timing component, I would think about the price and time concept as zones. Selling tops and buying bottoms is not something that I'm necessarily trying to accomplish. What I am trying to illustrate here is the notion of being vaguely right as opposed to precisely wrong. Just because a stock is above or below fair value is not a reason in and of itself to sell or buy. Although, just knowing what zone you are in helps me with how I should be "thinking" about the stock. This idea of a zone helps me to mentally prepare to acquire shares of stock when they are depressed and sell shares of stock when the price is elevated. The human brain is not wired to think this way and so we need tricks to alter our natural tendencies. I find that the concept of buying zones or selling zones removes the pressure of calling tops and bottoms and also forces my brain to think in terms of selling strength and buying weakness. This is how true professionals operate in the capital markets.
This is a fascinating topic for me. I find it disappointing that so many people mindlessly believe in these academic studies about efficient market theory. There is a time and cycle for everything. Harvesting crops. The moon. The seasons. Calendars. Everything. One simply as to observe to see what I see.
Happy returns!
P. Franklin, Jr.
May 19th, 2017
*I have no positions in Intel stock at this time.
All opinions and estimates included in this communication constitute the author’s judgment as of the date of this report and are subject to change without notice. This communication is for informational purposes only. It is not intended as an offer or solicitation with respect to the purchase or sale of any security. This information is subject to change at any time, based on market and other conditions. Any forward looking statements are just opinions – not a statement of fact.
Investing may involve risk including loss of principal. Investment returns, particularly over shorter time periods are highly dependent on trends in the various investment markets. Past performance does not guarantee future results.