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Author: ThyPeace Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 41629  
Subject: So about Verizon Date: 11/18/2012 5:05 PM
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I happen to own Verizon, or I did unless I've sold it. In my reviews of my stocks in the last month (a haphazard event that occurs sometimes monthly, sometimes yearly, and sometimes less frequently than that), I noticed an interesting trend.

Here are the RMS calculations (from www.bmwmethod.com; thanks Denny!) for VZ this week:

VZ 25 years 0.21
VZ 20 years 0.48
VZ 16 years 1.76

When I looked at them last week, the 16 year chart was actually above +2 RMS.

When I started looking, I realized that many of the other stocks I watch have a similar pattern. Over the long term, they are at the average, or so, of their performance. But in the shorter term shown on a 16 year chart, they're at the top of their ranges. So what is this odd pattern? It becomes instantly apparent if you actually look at the chart, at least it does to me.

Here's the VZ 25 year chart:

http://invest.kleinnet.com/bmw1/stats25/VZ.html (thanks Mike!)

What's interesting here, and what's affecting all the charts with a similar pattern, is the 2000 dot.com bubble. The whole bubble, from the 1997 start of the run-up, is still included in those charts, making the starting prices suddenly out of whack.

I think that, at least for the next few years as the 16 year charts continue to begin in the midst of the bubble, you'll see patterns that aren't so useful.

On the other hand, the longer charts (25 years and up) will be less affected by the dot.com bubble and 2008 crash simply because they contain more data.

AT&T (T) is another good example of a chart significantly affected by bubble appearance and then burst. Their price ran up in the 2000 stuff and also prior to 2008. Manitowoc (MTW), on the other hand, didn't budge in 2000. They're a heavy machinery company with no technology exposure. The 2008 crash, however, is clearly evident in their chart.

My point, such as it is, is that using charts to determine reversion to mean right now is a bit dicey. Volatility and external influences are common in the recent past and seem likely to continue in the future.

My approach will continue to be to look for good value in companies whose businesses I understand. GE is an interesting one to look at these days. It's actually below its 30 year -2 RMS. If you look at the last few years, you'll see that their business model changes led to a whole lot of unsustainable craziness. I wonder if they'll try it again, or go back to a steadier growth pattern.

ThyPeace, heading back on-topic just for fun.
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Author: kelbon Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 40803 of 41629
Subject: Re: So about Verizon Date: 11/18/2012 7:27 PM
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My point, such as it is, is that using charts to determine reversion to mean right now is a bit dicey.

I would go further and say that using charts to determine reversion to a mean is always is a bit dicey.

The perception that a price-CAGR chart going back 25 or 30 years has more verity than a 16 year one has a not insignificant factor weighing against it, that is: the longer a company is followed the more that company, over the span of time, is likely to have changed, adapted, or morphed into something other. Even if it hasn't the economic environment, and/or its customer base, likely has.

As you bring up AT&T, it's not the same company it was; not at all, and its been through the rinse a few times. AT&T is just a storied name that acquiring companies have leveraged for all it's worth creating the illusion of consistency and reliability when the truth has been anything but.

kelbon

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Author: WendyBG Big gold star, 5000 posts Top Favorite Fools Top Recommended Fools Feste Award Winner! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 40838 of 41629
Subject: Re: So about Verizon Date: 12/11/2012 1:15 AM
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<What's interesting here, and what's affecting all the charts with a similar pattern, is the 2000 dot.com bubble. The whole bubble, from the 1997 start of the run-up, is still included in those charts, making the starting prices suddenly out of whack.

I think that, at least for the next few years as the 16 year charts continue to begin in the midst of the bubble, you'll see patterns that aren't so useful.>

Sorry for the long delay, but I haven't been frequenting this board weekly as I did when Jack Cade published the Mr. Goodbuy stock screen.

When Build'M'Well (BMW) began his stock investing (so he told the story), he used the rulers and curves that all engineers owned before computer aided design. (My father had them, also.) BMW used his rulers to draw lines that seemed to make sense over the long term stock prices.

It was Dr. Mike Klein who used his deep math knowledge to draw curves and calculate CAGRs (for which we all owe him a debt of gratitude).

BMW himself said that admired Mike's math but he still used his rulers.

I agree with your observations that the 2000 stock bubble and the 2008 crash distorted the calculations of CAGR. It might make more sense to go back to BMW's method and draw your own curves with a ruler, using your feeling for how the market would realistically have valued stocks without these extreme swings.

As kelbon points out, the BMW Method only works if a company's business has been stable over the time period you are studying.

In addition, the unusual actions of the Federal Reserve since the 2008 crash (forcing money into stocks by inflating the money supply and cutting bond yields to zero) may be causing stock prices to rise. If and when the market is allowed to revert to normal, prices may drop. The lowest risk is probably with low-beta stocks with strong balance sheets, low P/E ratios and a well-covered dividend.

Wendy

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Author: captainccs Big funky green star, 20000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 40839 of 41629
Subject: Re: So about Verizon Date: 12/11/2012 10:17 AM
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It might make more sense to go back to BMW's method and draw your own curves with a ruler, using your feeling for how the market would realistically have valued stocks without these extreme swings.

Jim discussed the difference between his and Mike's results. Here is an example:

http://bmwmethod.com/conference/gallery.php?portfolio=2005&a...

BTW, Jim used a French curve to fit the curves:

http://www.google.com/images?client=safari&rls=en&q=...

BTW2: kelbon hated the conferences. Gave us enough grief about them, god knows why.

Denny Schlesinger

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