It is a bloody day on Wall Street and across the world's markets, but I am not worried, yet. Since I am mainly in biotechnology stocks I will be interested to see if England eventually stops using the EMA (European Medical Authority) to decide what new drugs to allow to be sold in the country. And of course if the dollar weakens that tends to hurt American pharmaceutical companies, as sales in Europe look worse once they are converted to dollars.
Meanwhile I see much of the value in my particular portfolio in the development pipelines of the companies I own. Successes and failures will have more of an impact than Brexit.
I had two articles published at Seeking Alpha this week:
Alnylam Readouts Offer 2017-2018 Catalysts
Microchip is a Buy on Atmel Transformation
I own a small amount of Alnylam, while Microchip Technology is one of my largest positions, representing almost 10% of my portfolio.
To see the other stocks I own or follow, with links to my notes on the companies, see:
William Meyers Stocks
Showing posts with label stocks. Show all posts
Showing posts with label stocks. Show all posts
Friday, June 24, 2016
Saturday, February 13, 2016
Amgen and possible biotech bottom
So far 2016 has been very tough on biotechnology and healthcare investors, including me. I continue to think that many if not most pharmaceutical company stocks are now undervalued. This is especially true of clinical stage companies if you have an investment horizon that allows their pipelines to mature.
I wrote an article about Amgen that was published at Seeking Alpha:
Amgen Valuation Now Excludes Potential Repatha Revenues
Amgen is one of the few biotech companies that pays a dividend. Gilead does too. In times like this when the market underappreciates pharma companies, the dividend reminds us that these companies are plenty profitable and are highly likely to become considerably more valuable for those who are patient.
Since I think we could be at a bottom I am going to be buying some more biotech stocks this week.
If it is not a bottom, it is because of panicky investors thinking wrongly. The more the market goes down, the more stock I will buy. This is a much better strategy than buying more because you are excited that the market (or a sector, or a particular stock) is going up. Provided you buy companies that have greater long term than present value. That means companies that look likely to get FDA and EU approvals for drugs that are in clinical trials now.
I have seen the market overvalue drugs in pipelines. Usually that is a result of assuming a drug will get FDA approval, and instead it being a dud. Sometimes investors, often pushed by brokers, get overexcited, so that following an FDA approval the drug cannot possibly generate enough revenue to justify the price prior to approval.
Watch out for that type of thing. But don't miss out on real opportunities when they present themselves. Look at each stock carefully before buying.
Remember, my writing is journalism, not investment advice.
I wrote an article about Amgen that was published at Seeking Alpha:
Amgen Valuation Now Excludes Potential Repatha Revenues
Amgen is one of the few biotech companies that pays a dividend. Gilead does too. In times like this when the market underappreciates pharma companies, the dividend reminds us that these companies are plenty profitable and are highly likely to become considerably more valuable for those who are patient.
Since I think we could be at a bottom I am going to be buying some more biotech stocks this week.
If it is not a bottom, it is because of panicky investors thinking wrongly. The more the market goes down, the more stock I will buy. This is a much better strategy than buying more because you are excited that the market (or a sector, or a particular stock) is going up. Provided you buy companies that have greater long term than present value. That means companies that look likely to get FDA and EU approvals for drugs that are in clinical trials now.
I have seen the market overvalue drugs in pipelines. Usually that is a result of assuming a drug will get FDA approval, and instead it being a dud. Sometimes investors, often pushed by brokers, get overexcited, so that following an FDA approval the drug cannot possibly generate enough revenue to justify the price prior to approval.
Watch out for that type of thing. But don't miss out on real opportunities when they present themselves. Look at each stock carefully before buying.
Remember, my writing is journalism, not investment advice.
Wednesday, September 24, 2014
Sources of Randomness in Stock Prices
When we follow an individual stock, or a stock market average like the Dow or Nasdaq 100, most of the time most of what we see is random movements. At one extreme the entire market can be seen as random, as espoused in A Random Walk Down Wall Street and elsewhere.
As an approximation that might be true, and so it may not be a bad suggestion that anyone who wants to participate in stocks, but does not want to be hassled by doing their own research and analysis, should just invest in index funds.
Of course we know the real world of corporate profits is not just random. Apple's stock rise is not just the result of randomness, nor is Blackberry's fall. You can make a fortune investing in the right companies when they are small and (hopefully) watching them grow.
Here I want to take a preliminary, non-scientific, look at some of the causes of "random" stock movements caused by buying and selling that are not driven by the anticipation or demonstration of increased or decreased earnings.
I began thinking about this back in the 1980's, when I was starting my own business while still working as a paralegal. I worked in a probate office, and this is what happened on an almost daily basis: stocks were sold. The stocks had typically been accumulated during a lifetime, then the owner had died, and then the estate was tied up in probate for a while. The "kids" -- often they were in their 60s -- had been waiting to inherit most of their lives. The moment it was legally possible the stocks were sold, converted to cash to be distributed.
It was rare to see anyone say, "hey, I'll sell all the stocks but Apple". Or "wait another month, the market is down today, we'll get more money if we wait a month." In fact that never happened that I recall.
So did your stock from $2 a share in an hour today? It could be bad news is circulating you have not heard about; it could be someone manipulating the price; or it could be that Wasp Savemoney, deceased, had a chunk of the company and it was dumped all at once.
Two seasonal times of selling stand out. College funds are also saved over a decade or more, only to be dissolved rather quickly starting with the first Freshman year tuition payment. When taxes are due, leading up to mid-April, so selling or failing to buy will be due to that.
When a house is bought, it may require cashing out stock to make the down. That, again, is timed to the escrow, not the ideal timing for maximizing stock value.
The financial news often accounts for stock market movements with bland terms like "profit taking." If selling is profit taking, is buying profit giving away?
A big factor in selling is portfolio limits. Wise investors do not allow themselves to become too concentrated in any particular stock. This is particularly true of professionally managed money. In my personal portfolio I am not supposed to have more than 10% in any one stock. In a large pension fund or mutual fund the percent might be 5% or even 2%.
So if a stock goes up enough, portfolio rules force managers to do some selling. They might think that the stock will continue to go up; they might have some power to make limited exemptions. But they are certainly not going to buy more of the stock, and at some point they must sell. For the manager this is not random, it is causal, but it appears random to the rest of the market.
If, like me, you manage your own investment portfolio, you want to know what is really going on. Mostly this is at the company level. You want to know factors contributing to next quarter's or next year's or next decade's profits.
But it is oh so much easier to while away the hours watching prices move. Perhaps even trying to outguess the other guessers.
Just keep in mind that people die on a daily basis, and some of them have substantial portfolios, and those almost always get sold and converted to cash. A bad flu sweeping through the more elegant nursing homes in December can cause the market to sink one day the following year.
To see a list of stocks I write about go here: William Meyers stock reports
To pick a stock randomly try my Random Stock Picker
As an approximation that might be true, and so it may not be a bad suggestion that anyone who wants to participate in stocks, but does not want to be hassled by doing their own research and analysis, should just invest in index funds.
Of course we know the real world of corporate profits is not just random. Apple's stock rise is not just the result of randomness, nor is Blackberry's fall. You can make a fortune investing in the right companies when they are small and (hopefully) watching them grow.
Here I want to take a preliminary, non-scientific, look at some of the causes of "random" stock movements caused by buying and selling that are not driven by the anticipation or demonstration of increased or decreased earnings.
I began thinking about this back in the 1980's, when I was starting my own business while still working as a paralegal. I worked in a probate office, and this is what happened on an almost daily basis: stocks were sold. The stocks had typically been accumulated during a lifetime, then the owner had died, and then the estate was tied up in probate for a while. The "kids" -- often they were in their 60s -- had been waiting to inherit most of their lives. The moment it was legally possible the stocks were sold, converted to cash to be distributed.
It was rare to see anyone say, "hey, I'll sell all the stocks but Apple". Or "wait another month, the market is down today, we'll get more money if we wait a month." In fact that never happened that I recall.
So did your stock from $2 a share in an hour today? It could be bad news is circulating you have not heard about; it could be someone manipulating the price; or it could be that Wasp Savemoney, deceased, had a chunk of the company and it was dumped all at once.
Two seasonal times of selling stand out. College funds are also saved over a decade or more, only to be dissolved rather quickly starting with the first Freshman year tuition payment. When taxes are due, leading up to mid-April, so selling or failing to buy will be due to that.
When a house is bought, it may require cashing out stock to make the down. That, again, is timed to the escrow, not the ideal timing for maximizing stock value.
The financial news often accounts for stock market movements with bland terms like "profit taking." If selling is profit taking, is buying profit giving away?
A big factor in selling is portfolio limits. Wise investors do not allow themselves to become too concentrated in any particular stock. This is particularly true of professionally managed money. In my personal portfolio I am not supposed to have more than 10% in any one stock. In a large pension fund or mutual fund the percent might be 5% or even 2%.
So if a stock goes up enough, portfolio rules force managers to do some selling. They might think that the stock will continue to go up; they might have some power to make limited exemptions. But they are certainly not going to buy more of the stock, and at some point they must sell. For the manager this is not random, it is causal, but it appears random to the rest of the market.
If, like me, you manage your own investment portfolio, you want to know what is really going on. Mostly this is at the company level. You want to know factors contributing to next quarter's or next year's or next decade's profits.
But it is oh so much easier to while away the hours watching prices move. Perhaps even trying to outguess the other guessers.
Just keep in mind that people die on a daily basis, and some of them have substantial portfolios, and those almost always get sold and converted to cash. A bad flu sweeping through the more elegant nursing homes in December can cause the market to sink one day the following year.
To see a list of stocks I write about go here: William Meyers stock reports
To pick a stock randomly try my Random Stock Picker
Sunday, February 9, 2014
There is no Stock Market
If you are an investor in financial instruments like stocks, bonds, options and derivatives, the most important thing to remember is: There Is No Stock Market.
When we talk loosely of "the stock market," it is not a problem as long as we keep in mind the reality underlying this terminology.
A stock market can be defined as a marketplace where stocks are bought and sold. Such stock markets exist. When I first visited New York City, in the 1970s, stock markets were not much different than they had been in the Netherlands in the 1400's or on Wall Street in the 1800's, except in scale. You could walk to a physical location like the New York Stock Exchange, literally on Wall Street, and watch a bunch of men (and I mean male humans) yelling, cryptically offering to buy or sell stock from each other, furiously writing down any transaction actually agreed upon.
Now most stocks and other financial instruments are traded electronically, with men in pits just an anachronism. Even during the men in pits era people began referring to indexes like the Dow Industrials or the S&P 500 as being "the market." It simplified things. Did the market go up or down today, this week, this year? Just look at the Dow numbers.
Stock prices, which represent the value of shares of individual companies, do have a loose tendency to go up and down together as a group. But the market being up or down, or flat, is a result of a summation and averaging process. Individual stocks that are included in the averages drive the indexes up and down, not the other way around [with the exception of index funds, which are obligated to buy or sell all the stocks in an index in the same proportion as they are represented in the index].
Individual stocks, in turn, go up and down depending on what bids there are to buy and sell their shares. People (and institutions they control) buy and sell shares all the time for all sorts of reasons.
If you want there to be a stock market for trading purposes you can buy an index fund. There are some powerful reasons for ordinary investors to buy index funds rather than individual stocks or managed mutual funds that in turn try to beat the indexes by buying and selling individual stocks.
Long ago certain traders and economists noticed that stock market movements (both pricing of individual stocks and of market averages) tend to be random over most periods of time. Take that observation as an ultimate truth and anyone who beats or is beaten by "the market" is simply a statistical variation, a lucky or unlucky gambler. Of those investors that do not exactly match the market average, half will to better than average and half worse than average over a given period of time. [For fuller arguments of this viewpoint see A Random Walk Down Wall Street by Burton G. Malkiel, Fooled by Randomness
by Nassim Nicholas Taleb, or for a more analytic presentation Pricing the Future
by George G. Szpiro]
Generally people buy a stock because they expect to make a profit on the investment. They may receive dividends, and the stock may go up in value over time. But most stocks most of the time are held by institutions, like pension funds and trust funds and 401k accounts. In other words, other people's money, which lessens the incentive to maximize returns. When stocks are bought and sold a commission (broker's fee) is generated, so there are individuals and institutions out there that encourage buying and selling for its own sake, which hurts returns which also adds to randomness.
Still, basic principles of investment apply. If a person buys the stock of an individual company and the price paid is less than the stream of future profits the company will generate, over time the investor will be rewarded with stock price appreciation and perhaps dividends. If a person buys a the stock of an individual company and the price paid is more than the stream of future profits the company will generate, over time the investor will see the price deteriorate.
By understanding the specifics of a company, including its culture, intellectual property, the profit margins that are "natural" for the particular business, and its position versus any competition, it is possible to be right more often than wrong about future profit streams.
Because sometimes unexpectedly bad things happen to good companies, and unexpectedly good things happen to bad (or at least mediocre) companies, most investors spread out there investments over a variety of companies.
In the Random Markets theory information spreads rapidly, so that anyone who cares to can know the prospects of any given company. This theory breaks down badly in reality. Most people don't know enough about business, or specific kinds of businesses, to do a good analysis themselves. Most are not willing to take the time to research a bunch of companies just to find a few gems. So most people trust specialists, ranging from the analysts of major Wall Street brokerage houses (sell-side analysts), to financial advisors and brokers, to tip-sheet writers, to poorly paid Internet journalists.
All these professionals charge money, one way or another, for their services. And they should: it takes time to research stocks and it takes marketing dollars to land clients, and then there are costs of operations. Despite that, on average they get an average return on the portfolios they create. So you can do better (unless you are one of the lucky people who gets an exceptional broker or financial advisor) by going to a low-cost Internet-based broker and buying stock-index funds.
Now suppose you are like me and think you can outsmart the professionals, including the Wall Street analysts (who after all mostly go straight from college or an MBA program into these positions with little real life or actual experience in business). I believe that if you can be unemotional, and do your homework, you can beat the averages, because I have done it.
The most important thing to remember, as you learn to spend long hours reading SEC documents and commentaries like mine at places like Seeking Alpha, is not that there is always a lot of pump-and-dump activity going on from penny stocks all the way up to Dow Industrials (and the reverse, short and trash activity). Although you should keep that in mind.
You should not care what the Dow did on any given day, or month, or year. Or, if you are like me, what the NASDAQ-100 did [most of my stock picks are from that index]. Except maybe as a benchmark for seeing if your strategy, or your picks, are doing better than the index funds.
There Is No Stock Market! There are only individual companies, and prices quoted through an auction system on a minute-by-minute basis. News may effect a stock's price on any given day, including news about the company's audited financial numbers for a quarter, but the only thing that really matters is the future stream of profits (that could be, but usually are not, doled out to the shareholders).
Do not hope for "the market" to bail out your bad choices, just because that has happened at times. The best way to get in trouble is to think that other fools are going to bid up a stock when there is no foundation for its price. If you own a stock that you cannot justify by coldly analyzing its potential for profits, you are the fool.
Down markets, when people panic and sell without discretion, as happened in 2008, are your friend. You should have cash to buy bargains because you sold overpriced stocks before the bust. But just because a company's price has fallen, even substantially, does not mean it is a good buy. Take your time and sort through the wreckage for the gems.
When you keep researching stocks and most seem to be priced higher than you can justify, revisit your holdings, because they may have risen to a point that can no longer be justified. But again, just because a stock went up does not mean you should sell it. The question to ask is: Why did the stock go up? If it was enthusiasm of newcomers, rather than because prospects for profit growth are still great, it is likely time to trade in that stock for cash.
While this advice is too general to help you select individual stocks, it is something to always keep in mind. Wall Street professionals tend to forget it. They get caught up in their own hype (which can include hyping certain stocks down, although most hype is in the upward direction).
There is no stock market, but being contrary is not in itself a strategy. If you go contrary to the sell-side Wall Street brokerage recommendations, be sure to have a very good reason for doing so. Some not-sufficiently good reasons: a guru recommended the stock. A relative recommended a stock. A financial advisor recommended a stock. Etc.
There is no stock market. There are only averages. If average is okay for you, invest in index funds. Baring the apocalypse, profits grow over time, and index funds grow over time. If you did not sell at the top, or at least half-way down, it is idiotic to sell at the bottom.
And keep diversified!
When we talk loosely of "the stock market," it is not a problem as long as we keep in mind the reality underlying this terminology.
A stock market can be defined as a marketplace where stocks are bought and sold. Such stock markets exist. When I first visited New York City, in the 1970s, stock markets were not much different than they had been in the Netherlands in the 1400's or on Wall Street in the 1800's, except in scale. You could walk to a physical location like the New York Stock Exchange, literally on Wall Street, and watch a bunch of men (and I mean male humans) yelling, cryptically offering to buy or sell stock from each other, furiously writing down any transaction actually agreed upon.
Now most stocks and other financial instruments are traded electronically, with men in pits just an anachronism. Even during the men in pits era people began referring to indexes like the Dow Industrials or the S&P 500 as being "the market." It simplified things. Did the market go up or down today, this week, this year? Just look at the Dow numbers.
Stock prices, which represent the value of shares of individual companies, do have a loose tendency to go up and down together as a group. But the market being up or down, or flat, is a result of a summation and averaging process. Individual stocks that are included in the averages drive the indexes up and down, not the other way around [with the exception of index funds, which are obligated to buy or sell all the stocks in an index in the same proportion as they are represented in the index].
Individual stocks, in turn, go up and down depending on what bids there are to buy and sell their shares. People (and institutions they control) buy and sell shares all the time for all sorts of reasons.
If you want there to be a stock market for trading purposes you can buy an index fund. There are some powerful reasons for ordinary investors to buy index funds rather than individual stocks or managed mutual funds that in turn try to beat the indexes by buying and selling individual stocks.
Long ago certain traders and economists noticed that stock market movements (both pricing of individual stocks and of market averages) tend to be random over most periods of time. Take that observation as an ultimate truth and anyone who beats or is beaten by "the market" is simply a statistical variation, a lucky or unlucky gambler. Of those investors that do not exactly match the market average, half will to better than average and half worse than average over a given period of time. [For fuller arguments of this viewpoint see A Random Walk Down Wall Street by Burton G. Malkiel, Fooled by Randomness
by Nassim Nicholas Taleb, or for a more analytic presentation Pricing the Future by George G. Szpiro]Generally people buy a stock because they expect to make a profit on the investment. They may receive dividends, and the stock may go up in value over time. But most stocks most of the time are held by institutions, like pension funds and trust funds and 401k accounts. In other words, other people's money, which lessens the incentive to maximize returns. When stocks are bought and sold a commission (broker's fee) is generated, so there are individuals and institutions out there that encourage buying and selling for its own sake, which hurts returns which also adds to randomness.
Still, basic principles of investment apply. If a person buys the stock of an individual company and the price paid is less than the stream of future profits the company will generate, over time the investor will be rewarded with stock price appreciation and perhaps dividends. If a person buys a the stock of an individual company and the price paid is more than the stream of future profits the company will generate, over time the investor will see the price deteriorate.
By understanding the specifics of a company, including its culture, intellectual property, the profit margins that are "natural" for the particular business, and its position versus any competition, it is possible to be right more often than wrong about future profit streams.
Because sometimes unexpectedly bad things happen to good companies, and unexpectedly good things happen to bad (or at least mediocre) companies, most investors spread out there investments over a variety of companies.
In the Random Markets theory information spreads rapidly, so that anyone who cares to can know the prospects of any given company. This theory breaks down badly in reality. Most people don't know enough about business, or specific kinds of businesses, to do a good analysis themselves. Most are not willing to take the time to research a bunch of companies just to find a few gems. So most people trust specialists, ranging from the analysts of major Wall Street brokerage houses (sell-side analysts), to financial advisors and brokers, to tip-sheet writers, to poorly paid Internet journalists.
All these professionals charge money, one way or another, for their services. And they should: it takes time to research stocks and it takes marketing dollars to land clients, and then there are costs of operations. Despite that, on average they get an average return on the portfolios they create. So you can do better (unless you are one of the lucky people who gets an exceptional broker or financial advisor) by going to a low-cost Internet-based broker and buying stock-index funds.
Now suppose you are like me and think you can outsmart the professionals, including the Wall Street analysts (who after all mostly go straight from college or an MBA program into these positions with little real life or actual experience in business). I believe that if you can be unemotional, and do your homework, you can beat the averages, because I have done it.
The most important thing to remember, as you learn to spend long hours reading SEC documents and commentaries like mine at places like Seeking Alpha, is not that there is always a lot of pump-and-dump activity going on from penny stocks all the way up to Dow Industrials (and the reverse, short and trash activity). Although you should keep that in mind.
You should not care what the Dow did on any given day, or month, or year. Or, if you are like me, what the NASDAQ-100 did [most of my stock picks are from that index]. Except maybe as a benchmark for seeing if your strategy, or your picks, are doing better than the index funds.
There Is No Stock Market! There are only individual companies, and prices quoted through an auction system on a minute-by-minute basis. News may effect a stock's price on any given day, including news about the company's audited financial numbers for a quarter, but the only thing that really matters is the future stream of profits (that could be, but usually are not, doled out to the shareholders).
Do not hope for "the market" to bail out your bad choices, just because that has happened at times. The best way to get in trouble is to think that other fools are going to bid up a stock when there is no foundation for its price. If you own a stock that you cannot justify by coldly analyzing its potential for profits, you are the fool.
Down markets, when people panic and sell without discretion, as happened in 2008, are your friend. You should have cash to buy bargains because you sold overpriced stocks before the bust. But just because a company's price has fallen, even substantially, does not mean it is a good buy. Take your time and sort through the wreckage for the gems.
When you keep researching stocks and most seem to be priced higher than you can justify, revisit your holdings, because they may have risen to a point that can no longer be justified. But again, just because a stock went up does not mean you should sell it. The question to ask is: Why did the stock go up? If it was enthusiasm of newcomers, rather than because prospects for profit growth are still great, it is likely time to trade in that stock for cash.
While this advice is too general to help you select individual stocks, it is something to always keep in mind. Wall Street professionals tend to forget it. They get caught up in their own hype (which can include hyping certain stocks down, although most hype is in the upward direction).
There is no stock market, but being contrary is not in itself a strategy. If you go contrary to the sell-side Wall Street brokerage recommendations, be sure to have a very good reason for doing so. Some not-sufficiently good reasons: a guru recommended the stock. A relative recommended a stock. A financial advisor recommended a stock. Etc.
There is no stock market. There are only averages. If average is okay for you, invest in index funds. Baring the apocalypse, profits grow over time, and index funds grow over time. If you did not sell at the top, or at least half-way down, it is idiotic to sell at the bottom.
And keep diversified!
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