Buying, Selling, Timing, and Prediction

Let's look at Apple

Following up on yesterday’s meandering rant, let’s get slightly more specific and consider a real company.

Hopefully you’ve heard about Apple (big company, makes computer things, headquartered in a spaceship). And, hopefully you’re familiar with its stock price:

Buying and Selling

If you bought Apple stock when the price was below fifty dollars a few years ago, you are probably happy (if you haven’t somehow managed to sell for a loss along the way). The question is, should you buy more now, sell some, or do nothing? Well, that all depends on what happens to the stock price.

Theoretically, there are only two answers to the question about what to do. Either you buy or you sell. That’s because, Apple is either the best investment in the entire market right now or there is something better out there where you should put your money.

Given that there are thousands of stocks out there, the chance that Apple is the best investment possible is fairly slim. Further, the best investment depends on the timing.

Timing

Yesterday, the best performing one-day return on a stock was VTNR, which went up +124%. Apple went down -1.24% yesterday. In hindsight, you would have wanted to buy VTNR.

Year to date, the best performing stock has been GameStop, which is up +1,249%. There’s also AMC (+1,151%), MOXC (+1,127%), and TKAT (+1,097%). Over that time, Apple is down -5.58%.

Very quickly, we can see that Apple hasn’t been the thing to buy recently. But, if you went back and bought Apple at $0.27 at the start of 2001, you would have a twenty-year price return of 46,948%. Not bad!

Thus, when we invest, we have to consider what a stock price is going to do in the future and over what time period. That creates two things we have to make guesses about! What is the best stock to pick and over what time period will that best performance occur?

Fortunately, we can control the time period question. We can decide prior to an analysis that we want to invest for one day, one week, one year, one decade, one century, and so on.

Prediction

The shorter of a horizon we choose, the less time long-run averages have to work. A great example of this is the COVID crash. If someone said on February 14, 2020 that the S&P 500 would go from the current 3,380.16 to 4,200.88 by May 28, 2021 you might say, “wow 24.3%, that is a really big return and seems unlikely in just fifteen months but not impossible.” And, that huge and unusual return you might think is unlikely didn’t even tell you about the ninth largest market crash since 1896 that happened in between!

So, the short-term can be volatile. Will GameStop, AMC, MOXC, TKAT do better than Apple over the next day or week? Who knows? Will Apple do better over the next twenty years…still hard to say but it might feel like we can venture to make a guess based more on the underlying fundamentals of the businesses.

And, that’s the key word. Fundamentals. Short-term decisions are volatile. Long-term, fundamentals of a business can play a bigger role in guiding price. Do the movie theaters of AMC present a fundamentally better growth play than the opportunities for Apple in computers…or machine learning…or services…or dozens of other things?

Putting it all together, if we think about stocks in the long term as opposed to the short term, fundamentals can play a bigger role in guiding our thoughts about whether the stock price will go up or down. It presents a rare tool that can give longer-term forecasting an anchor. But, it won’t do as much for us in the shorter-term. Oh, and we also have to forecast those fundamentals as well…so, it’s definitely not a freebie.

Best of all, there is a ton to cover on all of this, so we will have plenty to look at for a while here as we try to do the impossible - create reasonable forecasts for stock prices!

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