Stock forecasts, ESPP and more

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fingoals
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Stock forecasts, ESPP and more

Post by fingoals » Thu Mar 14, 2019 3:10 pm

I know that the following is not really aligned with Bogleheads' philosophy. However, I'm curious ... in general, but also from the perspective of a scenario when I join a company with an employee stock purchase plan (ESPP) and their stock is forecasted for, say, 30% growth for the next 12 months. So, on CNN Business individual stock's pages there is a section called Forecasts (I'm pretty sure that other related - and even more specialized - websites have similar sections). I'm wondering about what is the value of these plot-based forecasts? What information is used to produce them? Who does produce them? Could these forecasts be taken at face value and used to augment index-based approach with holding an employer's stock for extended period of time (instead of selling it as soon as it is allowed to pocket that typical 10% discount)?

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fingoals
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Re: Stock forecasts, ESPP and more

Post by fingoals » Fri Mar 15, 2019 1:30 pm

No thoughts at all? Bumping for another chance ...

DonIce
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Re: Stock forecasts, ESPP and more

Post by DonIce » Fri Mar 15, 2019 1:35 pm

The forecasts have absolutely zero credibility or credible methodology behind them. If people knew for sure that the stock would be worth 30% more in a year, they would have already bought it and driven the price up by that 30% today.

Most people here will advise you that if you are an employee of a company, you are already overexposed to that company's success or failure, and holding a lot of their stock only makes you even less diversified. I would recommend selling any stock you get through an ESPP and re-allocating it in your diversified portfolio of stocks and bonds.

alex_686
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Re: Stock forecasts, ESPP and more

Post by alex_686 » Fri Mar 15, 2019 1:42 pm

I don't know where you got your chart, but the most common is to poll stock analyst from brokerage firms. They often churn out reports with 1 year targets. They tend to have decent but optimistic predictions in this context - but I am a glass half full type of guy. With a premium data service - like Bloomberg - you should be able to peak behind the numbers, figure out who is issuing the reports, and pull up the actually reports with their reasoning and models.

There are a couple of problems. You have expected returns but not risk. Sure, with superior research and insight one can generate superior returns with single stock selections. But why would your ESPP stock happen to be one of those superior stocks? This just asks for behavioral and cognitive issues where you highly value the stock because you hold the stock. Lastly, why tie your stock returns to your human capital? What if the company goes bankrupt?

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fingoals
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Re: Stock forecasts, ESPP and more

Post by fingoals » Fri Mar 15, 2019 1:58 pm

DonIce wrote:
Fri Mar 15, 2019 1:35 pm
The forecasts have absolutely zero credibility or credible methodology behind them. If people knew for sure that the stock would be worth 30% more in a year, they would have already bought it and driven the price up by that 30% today.

Most people here will advise you that if you are an employee of a company, you are already overexposed to that company's success or failure, and holding a lot of their stock only makes you even less diversified. I would recommend selling any stock you get through an ESPP and re-allocating it in your diversified portfolio of stocks and bonds.
Thank you for sharing your thoughts. I was suspecting that people might label stock performance forecasting as a non-credible approach. Then how to explain the fact that forecasting in general, as a sub-domain of data science (or, statistics, if prefer old-fashioned terminology), seems to be considered a valid methodology? Aren't various technical indicators as well as corresponding contextual information (market news, industry trends, competition, etc.) factors that forecasting could be based on? Having said that, your point on predictive knowledge (IMO, only if made public!) impacting stock price, indeed, makes sense. So, thinking aloud, it seems to me that using forecasts still makes sense (for active traders), if those forecasts are generated by trusted sources and have limited distribution.

Re: ESPP-based stock - Understood. This is a good advice, thank you.

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fingoals
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Re: Stock forecasts, ESPP and more

Post by fingoals » Fri Mar 15, 2019 2:16 pm

alex_686 wrote:
Fri Mar 15, 2019 1:42 pm
I don't know where you got your chart, but the most common is to poll stock analyst from brokerage firms. They often churn out reports with 1 year targets. They tend to have decent but optimistic predictions in this context - but I am a glass half full type of guy. With a premium data service - like Bloomberg - you should be able to peak behind the numbers, figure out who is issuing the reports, and pull up the actually reports with their reasoning and models.

There are a couple of problems. You have expected returns but not risk. Sure, with superior research and insight one can generate superior returns with single stock selections. But why would your ESPP stock happen to be one of those superior stocks? This just asks for behavioral and cognitive issues where you highly value the stock because you hold the stock. Lastly, why tie your stock returns to your human capital? What if the company goes bankrupt?
Thank you for sharing your insights. As I mentioned in the original post, I got the chart from an individual ticker's page on CNN Business/Money, e.g.: https://money.cnn.com/quote/quote.html?symb=GOOG. Based DonIce's and, especially, your comment, it seems that using forecasts from credible (premium) sources still make some sense (for active traders).

Re: ESPP - I see. I agree on behavioral aspect. However, what I meant is whether it would make some sense to hold relevant ESPP-based stock in case when forecasts (if not from premium sources, at least, from trusted public ones) point to potential relatively long-term upward trend ...

core4portfolio
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Re: Stock forecasts, ESPP and more

Post by core4portfolio » Fri Mar 15, 2019 2:19 pm

Depends on company, there are many risk to be considered
For example... china issue, forex exchange, another competitor raised, marketing lgs and even market lags
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Taylor Larimore
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Re: Stock forecasts, ESPP and more

Post by Taylor Larimore » Fri Mar 15, 2019 2:22 pm

I'm wondering about what is the value of these plot-based forecasts?
fingols:

In my opinion, stock market forecasts are useless or worse -- especially for stay-the-course investors.

Best wishes
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle

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fingoals
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Re: Stock forecasts, ESPP and more

Post by fingoals » Fri Mar 15, 2019 2:28 pm

core4portfolio wrote:
Fri Mar 15, 2019 2:19 pm
Depends on company, there are many risk to be considered
For example... china issue, forex exchange, another competitor raised, marketing lgs and even market lags
Understood. Thank you for sharing your thoughts.

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fingoals
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Re: Stock forecasts, ESPP and more

Post by fingoals » Fri Mar 15, 2019 2:37 pm

Taylor Larimore wrote:
Fri Mar 15, 2019 2:22 pm
I'm wondering about what is the value of these plot-based forecasts?
fingols:

In my opinion, stock market forecasts are useless or worse -- especially for stay-the-course investors.

Best wishes
Taylor
Sure, I understand. My question was more about stay-the-course investors using forecasts just in the context of a single ESPP stock they might be exposed to at work ...

Wow, I cannot believe that I received a comment from you, Mr. Larimore. It's an honor. :beer

Best wishes,
fingoals

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Re: Stock forecasts, ESPP and more

Post by alex_686 » Fri Mar 15, 2019 2:56 pm

fingoals wrote:
Fri Mar 15, 2019 2:16 pm
However, what I meant is whether it would make some sense to hold relevant ESPP-based stock in case when forecasts (if not from premium sources, at least, from trusted public ones) point to potential relatively long-term upward trend ...
All stock forecasts are upward, all predict a relatively long-term upward trend. Well, maybe not all - there are a few edge cases out there. Anyway - I will point to the larger market, which has a long history of a relatively long-term upward trend.

I, sorta of, believe in these charts. Stock prices are based on the "Equity Risk Premium", which says that you get a return higher than a 10 year treasury for taking a higher risk than a 10 year treasury, and lets you put together some rather broad numbers which are very helpful in putting together a AA.

However, it is a different case at the individual stock level. If a stock has a higher predicted return than the stock market this strongly implies it has higher risk. Or maybe it has a lower expected return and thus lower risk. In any event, what does adding this stock do to your portfolio's risk/return profile, and does it make your portfolio more efficient in reaching your goals. Generally the answer is "no" - it does not, and that a diversified portfolio does it better.

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Re: Stock forecasts, ESPP and more

Post by abuss368 » Fri Mar 15, 2019 3:30 pm

fingoals wrote:
Thu Mar 14, 2019 3:10 pm
I know that the following is not really aligned with Bogleheads' philosophy. However, I'm curious ... in general, but also from the perspective of a scenario when I join a company with an employee stock purchase plan (ESPP) and their stock is forecasted for, say, 30% growth for the next 12 months. So, on CNN Business individual stock's pages there is a section called Forecasts (I'm pretty sure that other related - and even more specialized - websites have similar sections). I'm wondering about what is the value of these plot-based forecasts? What information is used to produce them? Who does produce them? Could these forecasts be taken at face value and used to augment index-based approach with holding an employer's stock for extended period of time (instead of selling it as soon as it is allowed to pocket that typical 10% discount)?

Image
I learned a long time ago to stop putting any weight or thought into stock (or bond) forecasts. In my opinion they are meaningless.
John C. Bogle: "You simply do not need to put your money into 8 different mutual funds!" | | Disclosure: Three Fund Portfolio + U.S. & International REITs

alex_686
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Re: Stock forecasts, ESPP and more

Post by alex_686 » Fri Mar 15, 2019 3:48 pm

abuss368 wrote:
Fri Mar 15, 2019 3:30 pm
I learned a long time ago to stop putting any weight or thought into stock (or bond) forecasts. In my opinion they are meaningless.
Let me modestly take the other side. As a analogy I will point to sports betting. The odds, which are laid down by professionals, are strong predictors of future outcomes. However, as a armature punter, this only provides modest help. If you always bet the odds you are only going to get average returns. Consider the cut the house takes in sports gambling, this is a losing proposition. So the odds contains important information, just not actionable information. Same here. The experts are providing important information - it just does not help in deciding to hold your ESPP.

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Re: Stock forecasts, ESPP and more

Post by vineviz » Fri Mar 15, 2019 3:57 pm

fingoals wrote:
Fri Mar 15, 2019 1:58 pm
Then how to explain the fact that forecasting in general, as a sub-domain of data science (or, statistics, if prefer old-fashioned terminology), seems to be considered a valid methodology?
It's not so much a probably with the statistical methods as with the noisiness of the data.

A team of the world's best statisticians, who can predict with sub-kilometer accuracy the impact point on Neptune of a rocket launched from Earth, will have no luck predicting tonight's Pick 4 lottery numbers with any better accuracy than a four year old kid with a crayon.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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Re: Stock forecasts, ESPP and more

Post by fingoals » Fri Mar 15, 2019 4:50 pm

alex_686 wrote:
Fri Mar 15, 2019 2:56 pm
fingoals wrote:
Fri Mar 15, 2019 2:16 pm
However, what I meant is whether it would make some sense to hold relevant ESPP-based stock in case when forecasts (if not from premium sources, at least, from trusted public ones) point to potential relatively long-term upward trend ...
All stock forecasts are upward, all predict a relatively long-term upward trend. Well, maybe not all - there are a few edge cases out there. Anyway - I will point to the larger market, which has a long history of a relatively long-term upward trend.

I, sorta of, believe in these charts. Stock prices are based on the "Equity Risk Premium", which says that you get a return higher than a 10 year treasury for taking a higher risk than a 10 year treasury, and lets you put together some rather broad numbers which are very helpful in putting together a AA.

However, it is a different case at the individual stock level. If a stock has a higher predicted return than the stock market this strongly implies it has higher risk. Or maybe it has a lower expected return and thus lower risk. In any event, what does adding this stock do to your portfolio's risk/return profile, and does it make your portfolio more efficient in reaching your goals. Generally the answer is "no" - it does not, and that a diversified portfolio does it better.
I appreciate your insights. However, I respectfully disagree with your statement "if a stock has a higher predicted return than the stock market this strongly implies it has higher risk". What is the basis for this? I understand that this is, indeed, true, when comparing risk/return ratio between asset classes (e.g., stocks vs. bonds) due to fundamental differences between said classes. However, when talking about individual stocks, based on my logic / current understanding, there are no reasons for a correlation between predicted or potential return and potential risk to exist. If company A has better business model, team, IP, product(s) and various other success factors than those of company B, why would company A stock's predicted or potential higher return be associated/correlated with potential higher risk?

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Re: Stock forecasts, ESPP and more

Post by fingoals » Fri Mar 15, 2019 4:52 pm

abuss368 wrote:
Fri Mar 15, 2019 3:30 pm
fingoals wrote:
Thu Mar 14, 2019 3:10 pm
I know that the following is not really aligned with Bogleheads' philosophy. However, I'm curious ... in general, but also from the perspective of a scenario when I join a company with an employee stock purchase plan (ESPP) and their stock is forecasted for, say, 30% growth for the next 12 months. So, on CNN Business individual stock's pages there is a section called Forecasts (I'm pretty sure that other related - and even more specialized - websites have similar sections). I'm wondering about what is the value of these plot-based forecasts? What information is used to produce them? Who does produce them? Could these forecasts be taken at face value and used to augment index-based approach with holding an employer's stock for extended period of time (instead of selling it as soon as it is allowed to pocket that typical 10% discount)?

Image
I learned a long time ago to stop putting any weight or thought into stock (or bond) forecasts. In my opinion they are meaningless.
Thank you for sharing your opinion.

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fingoals
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Re: Stock forecasts, ESPP and more

Post by fingoals » Fri Mar 15, 2019 5:05 pm

vineviz wrote:
Fri Mar 15, 2019 3:57 pm
fingoals wrote:
Fri Mar 15, 2019 1:58 pm
Then how to explain the fact that forecasting in general, as a sub-domain of data science (or, statistics, if prefer old-fashioned terminology), seems to be considered a valid methodology?
It's not so much a probably with the statistical methods as with the noisiness of the data.

A team of the world's best statisticians, who can predict with sub-kilometer accuracy the impact point on Neptune of a rocket launched from Earth, will have no luck predicting tonight's Pick 4 lottery numbers with any better accuracy than a four year old kid with a crayon.
Thank you for sharing your thoughts. I understand your point. However, I believe that stock price dynamics, despite being dependent on some noisy factors, essentially is still incomparably far more predictable than lottery results, which are practically random numbers. IMO, most of the factors driving stock performance are either fundamental, or information that can be obtained and computationally processed to form relevant correcting factors (e.g., market news, industry trends). Thus, I think that combining both categories' dynamics into a model should allow for a relatively accurate prediction (forecast) of an individual stock's performance.

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Re: Stock forecasts, ESPP and more

Post by Wiggums » Fri Mar 15, 2019 5:22 pm

Barchart has a lot of technical analysis information.
https://www.barchart.com/

I studied various technical analysis indicators and found that buying / holding was the only thing that worked for me. Even when I guessed right and bought stocks low, I sold way too soon. Also with technical trading going on, the market moves so fast that a lot of times I caught a falling knife.

I think the stock analysts are generally too positive about future prices.

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Re: Stock forecasts, ESPP and more

Post by vineviz » Fri Mar 15, 2019 5:49 pm

fingoals wrote:
Fri Mar 15, 2019 5:05 pm
Thank you for sharing your thoughts. I understand your point. However, I believe that stock price dynamics, despite being dependent on some noisy factors, essentially is still incomparably far more predictable than lottery results, which are practically random numbers. IMO, most of the factors driving stock performance are either fundamental, or information that can be obtained and computationally processed to form relevant correcting factors (e.g., market news, industry trends). Thus, I think that combining both categories' dynamics into a model should allow for a relatively accurate prediction (forecast) of an individual stock's performance.
You're not alone in thinking that, and many investors have a hard time understanding why techniques that work well in other fields don't translate into financial economics.

The free flow of information in the financial marketplace is so strong and so quick that any factor you could include in a prediction model is already effectively included in the models of thousands of other investors with billions of dollars in capital at their disposal.

What's left is a distribution of, as you say, practically random numbers. That might be hard to accept, but it's a truth that just is what it is.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

MotoTrojan
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Re: Stock forecasts, ESPP and more

Post by MotoTrojan » Fri Mar 15, 2019 8:33 pm

fingoals wrote:
Fri Mar 15, 2019 5:05 pm
vineviz wrote:
Fri Mar 15, 2019 3:57 pm
fingoals wrote:
Fri Mar 15, 2019 1:58 pm
Then how to explain the fact that forecasting in general, as a sub-domain of data science (or, statistics, if prefer old-fashioned terminology), seems to be considered a valid methodology?
It's not so much a probably with the statistical methods as with the noisiness of the data.

A team of the world's best statisticians, who can predict with sub-kilometer accuracy the impact point on Neptune of a rocket launched from Earth, will have no luck predicting tonight's Pick 4 lottery numbers with any better accuracy than a four year old kid with a crayon.
Thank you for sharing your thoughts. I understand your point. However, I believe that stock price dynamics, despite being dependent on some noisy factors, essentially is still incomparably far more predictable than lottery results, which are practically random numbers. IMO, most of the factors driving stock performance are either fundamental, or information that can be obtained and computationally processed to form relevant correcting factors (e.g., market news, industry trends). Thus, I think that combining both categories' dynamics into a model should allow for a relatively accurate prediction (forecast) of an individual stock's performance.
You are right. We have the info to predict what a company will do in the future and guess what, that is all reflected in the current price. Saying that you think Amazon will takeover the world and be wildly successful is not the same as saying you think their stock will outperform, because wild success is already priced in. Your stock outperforms when it beats expectations, not when it produces more economically than other businesses. Any prediction or info with merit will already be priced in.

alex_686
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Re: Stock forecasts, ESPP and more

Post by alex_686 » Sat Mar 16, 2019 8:52 am

fingoals wrote:
Fri Mar 15, 2019 4:50 pm
I appreciate your insights. However, I respectfully disagree with your statement "if a stock has a higher predicted return than the stock market this strongly implies it has higher risk". What is the basis for this? I understand that this is, indeed, true, when comparing risk/return ratio between asset classes (e.g., stocks vs. bonds) due to fundamental differences between said classes. However, when talking about individual stocks, based on my logic / current understanding, there are no reasons for a correlation between predicted or potential return and potential risk to exist. If company A has better business model, team, IP, product(s) and various other success factors than those of company B, why would company A stock's predicted or potential higher return be associated/correlated with potential higher risk?
The specific theory is Equity Risk Premium and Beta. If I want extra return I need to take extra return. The theory largely holds in the real world.

Consider your example. Company A seems to be of higher quality, thus it would have a higher price as of today. That quality (higher growth / lower risk) is already priced into the price. It is company B that is more speculative. Since it is more speculative, it will have a lower price and higher expected returns. I will point out that in 2017 speculative Best Buy had higher returns than that sure bet of Amazon.

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Re: Stock forecasts, ESPP and more

Post by MotoTrojan » Sat Mar 16, 2019 2:04 pm

alex_686 wrote:
Sat Mar 16, 2019 8:52 am
fingoals wrote:
Fri Mar 15, 2019 4:50 pm
I appreciate your insights. However, I respectfully disagree with your statement "if a stock has a higher predicted return than the stock market this strongly implies it has higher risk". What is the basis for this? I understand that this is, indeed, true, when comparing risk/return ratio between asset classes (e.g., stocks vs. bonds) due to fundamental differences between said classes. However, when talking about individual stocks, based on my logic / current understanding, there are no reasons for a correlation between predicted or potential return and potential risk to exist. If company A has better business model, team, IP, product(s) and various other success factors than those of company B, why would company A stock's predicted or potential higher return be associated/correlated with potential higher risk?
The specific theory is Equity Risk Premium and Beta. If I want extra return I need to take extra return. The theory largely holds in the real world.

Consider your example. Company A seems to be of higher quality, thus it would have a higher price as of today. That quality (higher growth / lower risk) is already priced into the price. It is company B that is more speculative. Since it is more speculative, it will have a lower price and higher expected returns. I will point out that in 2017 speculative Best Buy had higher returns than that sure bet of Amazon.
Isn’t the valuation disparity offsetting the expected return disparity/risk? All your example means is that BB beat it’s expectations more so than Amazon, but that doesn’t tell us anything about expected returns, just actual ones.

alex_686
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Re: Stock forecasts, ESPP and more

Post by alex_686 » Sat Mar 16, 2019 4:19 pm

MotoTrojan wrote:
Sat Mar 16, 2019 2:04 pm
Isn’t the valuation disparity offsetting the expected return disparity/risk? All your example means is that BB beat it’s expectations more so than Amazon, but that doesn’t tell us anything about expected returns, just actual ones.
So let me repeat some things. Risk and return are linked. The holly grail is to find a high return / low risk strategy. One has not been found. I will point to my earlier post that investing is more like sports gambling then the lotto. There is a lot of information out there, mostly well incorporated into the odds or stock price. For investments, this is true on the asset class level (stocks/bonds), factor level (size, value), or individual stock (Beta). You can use either a priori and a posteriori estimates. Lots of good studies out there confirm this.

To BB. Is it the chicken or the egg? BB was a value stock. Value stocks offer higher return and higher risks then the general market. You can go back to 2016 and pull the stock annalists reports for BB. Most were bleak. Or you could pull the charts, which had a high volatility.

Why invest in a weak company? Back to the OP, there are good companies and bad companies, good stocks and bad stocks, and I can find company / stock pairings for all 4 combinations. i.e., BB - bad company, good stock.

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Re: Stock forecasts, ESPP and more

Post by fingoals » Sat Mar 16, 2019 7:16 pm

Wiggums wrote:
Fri Mar 15, 2019 5:22 pm
Barchart has a lot of technical analysis information.
https://www.barchart.com/

I studied various technical analysis indicators and found that buying / holding was the only thing that worked for me. Even when I guessed right and bought stocks low, I sold way too soon. Also with technical trading going on, the market moves so fast that a lot of times I caught a falling knife.

I think the stock analysts are generally too positive about future prices.
Thank you for sharing the link and your thoughts. Re: "sold way too soon" - I understand, but in order to be beat index-file performance, IMO you don't have to hold a well-performing stock during the whole upward swing, just long enough to realize significant positive difference from general / total stock market's performance.

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fingoals
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Re: Stock forecasts, ESPP and more

Post by fingoals » Sat Mar 16, 2019 7:23 pm

vineviz wrote:
Fri Mar 15, 2019 5:49 pm
fingoals wrote:
Fri Mar 15, 2019 5:05 pm
Thank you for sharing your thoughts. I understand your point. However, I believe that stock price dynamics, despite being dependent on some noisy factors, essentially is still incomparably far more predictable than lottery results, which are practically random numbers. IMO, most of the factors driving stock performance are either fundamental, or information that can be obtained and computationally processed to form relevant correcting factors (e.g., market news, industry trends). Thus, I think that combining both categories' dynamics into a model should allow for a relatively accurate prediction (forecast) of an individual stock's performance.
You're not alone in thinking that, and many investors have a hard time understanding why techniques that work well in other fields don't translate into financial economics.

The free flow of information in the financial marketplace is so strong and so quick that any factor you could include in a prediction model is already effectively included in the models of thousands of other investors with billions of dollars in capital at their disposal.

What's left is a distribution of, as you say, practically random numbers. That might be hard to accept, but it's a truth that just is what it is.
"... any factor you could include in a prediction model is already effectively included in the models of thousands of other investors with billions of dollars in capital at their disposal" -- So what? Why does it prevent me (or anybody else) as an independent individual investor to recognize a good (based on some fundamental/stable factors, not some fast-changing ones) stock, buy it and then hold it for time long enough to realize gains that are much better than general/total market?

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fingoals
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Re: Stock forecasts, ESPP and more

Post by fingoals » Sat Mar 16, 2019 7:27 pm

MotoTrojan wrote:
Fri Mar 15, 2019 8:33 pm
fingoals wrote:
Fri Mar 15, 2019 5:05 pm
vineviz wrote:
Fri Mar 15, 2019 3:57 pm
fingoals wrote:
Fri Mar 15, 2019 1:58 pm
Then how to explain the fact that forecasting in general, as a sub-domain of data science (or, statistics, if prefer old-fashioned terminology), seems to be considered a valid methodology?
It's not so much a probably with the statistical methods as with the noisiness of the data.

A team of the world's best statisticians, who can predict with sub-kilometer accuracy the impact point on Neptune of a rocket launched from Earth, will have no luck predicting tonight's Pick 4 lottery numbers with any better accuracy than a four year old kid with a crayon.
Thank you for sharing your thoughts. I understand your point. However, I believe that stock price dynamics, despite being dependent on some noisy factors, essentially is still incomparably far more predictable than lottery results, which are practically random numbers. IMO, most of the factors driving stock performance are either fundamental, or information that can be obtained and computationally processed to form relevant correcting factors (e.g., market news, industry trends). Thus, I think that combining both categories' dynamics into a model should allow for a relatively accurate prediction (forecast) of an individual stock's performance.
You are right. We have the info to predict what a company will do in the future and guess what, that is all reflected in the current price. Saying that you think Amazon will takeover the world and be wildly successful is not the same as saying you think their stock will outperform, because wild success is already priced in. Your stock outperforms when it beats expectations, not when it produces more economically than other businesses. Any prediction or info with merit will already be priced in.
Sorry, but I don't get that "already priced in point". IMO, it is irrelevant. How does current price of a stock prevent me (or anybody else) as an independent individual investor to recognize it as a good (based on some fundamental/stable factors) one, buy it and then hold it for time long enough to realize gains that are much better than general/total market?

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vineviz
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Re: Stock forecasts, ESPP and more

Post by vineviz » Sat Mar 16, 2019 7:29 pm

fingoals wrote:
Sat Mar 16, 2019 7:23 pm
vineviz wrote:
Fri Mar 15, 2019 5:49 pm
fingoals wrote:
Fri Mar 15, 2019 5:05 pm
Thank you for sharing your thoughts. I understand your point. However, I believe that stock price dynamics, despite being dependent on some noisy factors, essentially is still incomparably far more predictable than lottery results, which are practically random numbers. IMO, most of the factors driving stock performance are either fundamental, or information that can be obtained and computationally processed to form relevant correcting factors (e.g., market news, industry trends). Thus, I think that combining both categories' dynamics into a model should allow for a relatively accurate prediction (forecast) of an individual stock's performance.
You're not alone in thinking that, and many investors have a hard time understanding why techniques that work well in other fields don't translate into financial economics.

The free flow of information in the financial marketplace is so strong and so quick that any factor you could include in a prediction model is already effectively included in the models of thousands of other investors with billions of dollars in capital at their disposal.

What's left is a distribution of, as you say, practically random numbers. That might be hard to accept, but it's a truth that just is what it is.
"... any factor you could include in a prediction model is already effectively included in the models of thousands of other investors with billions of dollars in capital at their disposal" -- So what? Why does it prevent me (or anybody else) as an independent individual investor to recognize a good (based on some fundamental/stable factors, not some fast-changing ones) stock, buy it and then hold it for time long enough to realize gains that are much better than general/total market?
You’re in a competition with a world full of people who are more experienced, better capitalized, better equipped, and smarter than you are.

The only way to win that game is to not play it.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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fingoals
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Re: Stock forecasts, ESPP and more

Post by fingoals » Sat Mar 16, 2019 7:31 pm

alex_686 wrote:
Sat Mar 16, 2019 8:52 am
fingoals wrote:
Fri Mar 15, 2019 4:50 pm
I appreciate your insights. However, I respectfully disagree with your statement "if a stock has a higher predicted return than the stock market this strongly implies it has higher risk". What is the basis for this? I understand that this is, indeed, true, when comparing risk/return ratio between asset classes (e.g., stocks vs. bonds) due to fundamental differences between said classes. However, when talking about individual stocks, based on my logic / current understanding, there are no reasons for a correlation between predicted or potential return and potential risk to exist. If company A has better business model, team, IP, product(s) and various other success factors than those of company B, why would company A stock's predicted or potential higher return be associated/correlated with potential higher risk?
The specific theory is Equity Risk Premium and Beta. If I want extra return I need to take extra return. The theory largely holds in the real world.

Consider your example. Company A seems to be of higher quality, thus it would have a higher price as of today. That quality (higher growth / lower risk) is already priced into the price. It is company B that is more speculative. Since it is more speculative, it will have a lower price and higher expected returns. I will point out that in 2017 speculative Best Buy had higher returns than that sure bet of Amazon.
Thank you for pointing to relevant theory - will take a look. However, I still don't understand (based on my normal logic) the "already priced in" argument. Please see my previous relevant comment.

Topic Author
fingoals
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Re: Stock forecasts, ESPP and more

Post by fingoals » Sat Mar 16, 2019 7:47 pm

vineviz wrote:
Sat Mar 16, 2019 7:29 pm
fingoals wrote:
Sat Mar 16, 2019 7:23 pm
vineviz wrote:
Fri Mar 15, 2019 5:49 pm
fingoals wrote:
Fri Mar 15, 2019 5:05 pm
Thank you for sharing your thoughts. I understand your point. However, I believe that stock price dynamics, despite being dependent on some noisy factors, essentially is still incomparably far more predictable than lottery results, which are practically random numbers. IMO, most of the factors driving stock performance are either fundamental, or information that can be obtained and computationally processed to form relevant correcting factors (e.g., market news, industry trends). Thus, I think that combining both categories' dynamics into a model should allow for a relatively accurate prediction (forecast) of an individual stock's performance.
You're not alone in thinking that, and many investors have a hard time understanding why techniques that work well in other fields don't translate into financial economics.

The free flow of information in the financial marketplace is so strong and so quick that any factor you could include in a prediction model is already effectively included in the models of thousands of other investors with billions of dollars in capital at their disposal.

What's left is a distribution of, as you say, practically random numbers. That might be hard to accept, but it's a truth that just is what it is.
"... any factor you could include in a prediction model is already effectively included in the models of thousands of other investors with billions of dollars in capital at their disposal" -- So what? Why does it prevent me (or anybody else) as an independent individual investor to recognize a good (based on some fundamental/stable factors, not some fast-changing ones) stock, buy it and then hold it for time long enough to realize gains that are much better than general/total market?
You’re in a competition with a world full of people who are more experienced, better capitalized, better equipped, and smarter than you are.

The only way to win that game is to not play it.
Sorry, but it makes no sense to me in this context. How relevant is the fact that there are people out there who are "more experienced, better capitalized, better equipped, and smarter" to a scenario where I would base my stock market actions on fundamental/stable predictors and long-term stock dynamics (ignoring fluctuations/noise)? I have the same access - in terms of buying/selling - to the market as other players, regardless of their skills, experience and capitalization - I would simply buy (what I believe is) an attractive stock at $X, hold it for Y years (that is, long enough) and then, when/if I think that the winning predictors combination is no longer true, sell it at $Z, making profit $P. If that stock would actually be a winning one (based on fundamentals and/or my thesis), relevant performance would significantly beat the general/total market's performance for the corresponding period. Example (AMZN, recent 5 years' performance):

Image

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vineviz
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Re: Stock forecasts, ESPP and more

Post by vineviz » Sat Mar 16, 2019 8:31 pm

fingoals wrote:
Sat Mar 16, 2019 7:47 pm

Sorry, but it makes no sense to me in this context. How relevant is the fact that there are people out there who are "more experienced, better capitalized, better equipped, and smarter" to a scenario where I would base my stock market actions on fundamental/stable predictors and long-term stock dynamics (ignoring fluctuations/noise)?
Are you trolling, or do you genuinely not know the answer to this question?
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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Re: Stock forecasts, ESPP and more

Post by z3r0c00l » Sat Mar 16, 2019 8:37 pm

If CNN could forecast stock returns, they wouldn't have to be in the news business anymore. The very fact that CNN does not trade stocks full time indicates that these predictions don't work.

MotoTrojan
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Joined: Wed Feb 01, 2017 8:39 pm

Re: Stock forecasts, ESPP and more

Post by MotoTrojan » Sat Mar 16, 2019 8:50 pm

fingoals wrote:
Sat Mar 16, 2019 7:31 pm
alex_686 wrote:
Sat Mar 16, 2019 8:52 am
fingoals wrote:
Fri Mar 15, 2019 4:50 pm
I appreciate your insights. However, I respectfully disagree with your statement "if a stock has a higher predicted return than the stock market this strongly implies it has higher risk". What is the basis for this? I understand that this is, indeed, true, when comparing risk/return ratio between asset classes (e.g., stocks vs. bonds) due to fundamental differences between said classes. However, when talking about individual stocks, based on my logic / current understanding, there are no reasons for a correlation between predicted or potential return and potential risk to exist. If company A has better business model, team, IP, product(s) and various other success factors than those of company B, why would company A stock's predicted or potential higher return be associated/correlated with potential higher risk?
The specific theory is Equity Risk Premium and Beta. If I want extra return I need to take extra return. The theory largely holds in the real world.

Consider your example. Company A seems to be of higher quality, thus it would have a higher price as of today. That quality (higher growth / lower risk) is already priced into the price. It is company B that is more speculative. Since it is more speculative, it will have a lower price and higher expected returns. I will point out that in 2017 speculative Best Buy had higher returns than that sure bet of Amazon.
Thank you for pointing to relevant theory - will take a look. However, I still don't understand (based on my normal logic) the "already priced in" argument. Please see my previous relevant comment.
This is equity 101 so I think you may not be understanding where I am coming from.

Let’s compare Amazon to Best Buy. Amazon’s P/E is 85 where as BB is 13.4. It is presumed that Amazon will outperform BB in growing its business. This is reflected in Amazon’s high P/E, meaning for every $1 each is currently earning, you are paying >6x more to buy equity in Amazon. Why? Because it’s priced in that they will grow their earnings more quickly (or more likely) than BB.

In order for someone to use information to beat the market, they must determine which company will outperform expectations, not outperform the other.

After rereading your post I think you actually agree with me, the market is theoretically efficiently priced for equal risk-adjusted return. My explanation of priced in still stands.

Small-cap has a higher expected return but not a higher risk-adjusted one too. That’s also priced in.

Topic Author
fingoals
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Re: Stock forecasts, ESPP and more

Post by fingoals » Sat Mar 16, 2019 9:51 pm

vineviz wrote:
Sat Mar 16, 2019 8:31 pm
fingoals wrote:
Sat Mar 16, 2019 7:47 pm

Sorry, but it makes no sense to me in this context. How relevant is the fact that there are people out there who are "more experienced, better capitalized, better equipped, and smarter" to a scenario where I would base my stock market actions on fundamental/stable predictors and long-term stock dynamics (ignoring fluctuations/noise)?
Are you trolling, or do you genuinely not know the answer to this question?
That was a rhetorical question. I know my answer to this question. Perhaps, it's a wrong answer, though. But I'm definitely not trolling.

Topic Author
fingoals
Posts: 240
Joined: Thu Jan 24, 2019 6:43 pm

Re: Stock forecasts, ESPP and more

Post by fingoals » Sat Mar 16, 2019 9:54 pm

z3r0c00l wrote:
Sat Mar 16, 2019 8:37 pm
If CNN could forecast stock returns, they wouldn't have to be in the news business anymore. The very fact that CNN does not trade stocks full time indicates that these predictions don't work.
Well, it is obvious to me that forecasts that CNN publishes are produced not by CNN, but rather by some financial firm(s).

Topic Author
fingoals
Posts: 240
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Re: Stock forecasts, ESPP and more

Post by fingoals » Sat Mar 16, 2019 11:06 pm

MotoTrojan wrote:
Sat Mar 16, 2019 8:50 pm
fingoals wrote:
Sat Mar 16, 2019 7:31 pm
alex_686 wrote:
Sat Mar 16, 2019 8:52 am
fingoals wrote:
Fri Mar 15, 2019 4:50 pm
I appreciate your insights. However, I respectfully disagree with your statement "if a stock has a higher predicted return than the stock market this strongly implies it has higher risk". What is the basis for this? I understand that this is, indeed, true, when comparing risk/return ratio between asset classes (e.g., stocks vs. bonds) due to fundamental differences between said classes. However, when talking about individual stocks, based on my logic / current understanding, there are no reasons for a correlation between predicted or potential return and potential risk to exist. If company A has better business model, team, IP, product(s) and various other success factors than those of company B, why would company A stock's predicted or potential higher return be associated/correlated with potential higher risk?
The specific theory is Equity Risk Premium and Beta. If I want extra return I need to take extra return. The theory largely holds in the real world.

Consider your example. Company A seems to be of higher quality, thus it would have a higher price as of today. That quality (higher growth / lower risk) is already priced into the price. It is company B that is more speculative. Since it is more speculative, it will have a lower price and higher expected returns. I will point out that in 2017 speculative Best Buy had higher returns than that sure bet of Amazon.
Thank you for pointing to relevant theory - will take a look. However, I still don't understand (based on my normal logic) the "already priced in" argument. Please see my previous relevant comment.
This is equity 101 so I think you may not be understanding where I am coming from.

Let’s compare Amazon to Best Buy. Amazon’s P/E is 85 where as BB is 13.4. It is presumed that Amazon will outperform BB in growing its business. This is reflected in Amazon’s high P/E, meaning for every $1 each is currently earning, you are paying >6x more to buy equity in Amazon. Why? Because it’s priced in that they will grow their earnings more quickly (or more likely) than BB.

In order for someone to use information to beat the market, they must determine which company will outperform expectations, not outperform the other.

After rereading your post I think you actually agree with me, the market is theoretically efficiently priced for equal risk-adjusted return. My explanation of priced in still stands.

Small-cap has a higher expected return but not a higher risk-adjusted one too. That’s also priced in.
I appreciate your desire to explain this to me and your patience. I've just refreshed my Equity/Investing 101 knowledge and, indeed, I agree with you on the impact of P/E ratio on ROI (the "priced in" point). Moreover, I did some additional reading on market timing and now better understand risks associated with this approach (as vineviz put it, "the only way to win that game is to not play it"). Conclusion: I have a lot more to learn. :-)

MotoTrojan
Posts: 3527
Joined: Wed Feb 01, 2017 8:39 pm

Re: Stock forecasts, ESPP and more

Post by MotoTrojan » Sun Mar 17, 2019 5:01 am

fingoals wrote:
Sat Mar 16, 2019 11:06 pm
MotoTrojan wrote:
Sat Mar 16, 2019 8:50 pm
fingoals wrote:
Sat Mar 16, 2019 7:31 pm
alex_686 wrote:
Sat Mar 16, 2019 8:52 am
fingoals wrote:
Fri Mar 15, 2019 4:50 pm
I appreciate your insights. However, I respectfully disagree with your statement "if a stock has a higher predicted return than the stock market this strongly implies it has higher risk". What is the basis for this? I understand that this is, indeed, true, when comparing risk/return ratio between asset classes (e.g., stocks vs. bonds) due to fundamental differences between said classes. However, when talking about individual stocks, based on my logic / current understanding, there are no reasons for a correlation between predicted or potential return and potential risk to exist. If company A has better business model, team, IP, product(s) and various other success factors than those of company B, why would company A stock's predicted or potential higher return be associated/correlated with potential higher risk?
The specific theory is Equity Risk Premium and Beta. If I want extra return I need to take extra return. The theory largely holds in the real world.

Consider your example. Company A seems to be of higher quality, thus it would have a higher price as of today. That quality (higher growth / lower risk) is already priced into the price. It is company B that is more speculative. Since it is more speculative, it will have a lower price and higher expected returns. I will point out that in 2017 speculative Best Buy had higher returns than that sure bet of Amazon.
Thank you for pointing to relevant theory - will take a look. However, I still don't understand (based on my normal logic) the "already priced in" argument. Please see my previous relevant comment.
This is equity 101 so I think you may not be understanding where I am coming from.

Let’s compare Amazon to Best Buy. Amazon’s P/E is 85 where as BB is 13.4. It is presumed that Amazon will outperform BB in growing its business. This is reflected in Amazon’s high P/E, meaning for every $1 each is currently earning, you are paying >6x more to buy equity in Amazon. Why? Because it’s priced in that they will grow their earnings more quickly (or more likely) than BB.

In order for someone to use information to beat the market, they must determine which company will outperform expectations, not outperform the other.

After rereading your post I think you actually agree with me, the market is theoretically efficiently priced for equal risk-adjusted return. My explanation of priced in still stands.

Small-cap has a higher expected return but not a higher risk-adjusted one too. That’s also priced in.
I appreciate your desire to explain this to me and your patience. I've just refreshed my Equity/Investing 101 knowledge and, indeed, I agree with you on the impact of P/E ratio on ROI (the "priced in" point). Moreover, I did some additional reading on market timing and now better understand risks associated with this approach (as vineviz put it, "the only way to win that game is to not play it"). Conclusion: I have a lot more to learn. :-)
Keep learning, we all have lots to learn!

z3r0c00l
Posts: 1332
Joined: Fri Jul 06, 2012 11:43 am
Location: NYC
Contact:

Re: Stock forecasts, ESPP and more

Post by z3r0c00l » Sun Mar 17, 2019 6:25 am

fingoals wrote:
Sat Mar 16, 2019 9:54 pm
z3r0c00l wrote:
Sat Mar 16, 2019 8:37 pm
If CNN could forecast stock returns, they wouldn't have to be in the news business anymore. The very fact that CNN does not trade stocks full time indicates that these predictions don't work.
Well, it is obvious to me that forecasts that CNN publishes are produced not by CNN, but rather by some financial firm(s).
The same logic applies. If those firms had any confidence in their projections, they wouldn't release the information to the public and would quickly make billions on it.

Topic Author
fingoals
Posts: 240
Joined: Thu Jan 24, 2019 6:43 pm

Re: Stock forecasts, ESPP and more

Post by fingoals » Sun Mar 17, 2019 3:28 pm

MotoTrojan wrote:
Sun Mar 17, 2019 5:01 am
fingoals wrote:
Sat Mar 16, 2019 11:06 pm
MotoTrojan wrote:
Sat Mar 16, 2019 8:50 pm
fingoals wrote:
Sat Mar 16, 2019 7:31 pm
alex_686 wrote:
Sat Mar 16, 2019 8:52 am


The specific theory is Equity Risk Premium and Beta. If I want extra return I need to take extra return. The theory largely holds in the real world.

Consider your example. Company A seems to be of higher quality, thus it would have a higher price as of today. That quality (higher growth / lower risk) is already priced into the price. It is company B that is more speculative. Since it is more speculative, it will have a lower price and higher expected returns. I will point out that in 2017 speculative Best Buy had higher returns than that sure bet of Amazon.
Thank you for pointing to relevant theory - will take a look. However, I still don't understand (based on my normal logic) the "already priced in" argument. Please see my previous relevant comment.
This is equity 101 so I think you may not be understanding where I am coming from.

Let’s compare Amazon to Best Buy. Amazon’s P/E is 85 where as BB is 13.4. It is presumed that Amazon will outperform BB in growing its business. This is reflected in Amazon’s high P/E, meaning for every $1 each is currently earning, you are paying >6x more to buy equity in Amazon. Why? Because it’s priced in that they will grow their earnings more quickly (or more likely) than BB.

In order for someone to use information to beat the market, they must determine which company will outperform expectations, not outperform the other.

After rereading your post I think you actually agree with me, the market is theoretically efficiently priced for equal risk-adjusted return. My explanation of priced in still stands.

Small-cap has a higher expected return but not a higher risk-adjusted one too. That’s also priced in.
I appreciate your desire to explain this to me and your patience. I've just refreshed my Equity/Investing 101 knowledge and, indeed, I agree with you on the impact of P/E ratio on ROI (the "priced in" point). Moreover, I did some additional reading on market timing and now better understand risks associated with this approach (as vineviz put it, "the only way to win that game is to not play it"). Conclusion: I have a lot more to learn. :-)
Keep learning, we all have lots to learn!
Indeed. Thank you for your kind support!

Topic Author
fingoals
Posts: 240
Joined: Thu Jan 24, 2019 6:43 pm

Re: Stock forecasts, ESPP and more

Post by fingoals » Sun Mar 17, 2019 3:36 pm

z3r0c00l wrote:
Sun Mar 17, 2019 6:25 am
fingoals wrote:
Sat Mar 16, 2019 9:54 pm
z3r0c00l wrote:
Sat Mar 16, 2019 8:37 pm
If CNN could forecast stock returns, they wouldn't have to be in the news business anymore. The very fact that CNN does not trade stocks full time indicates that these predictions don't work.
Well, it is obvious to me that forecasts that CNN publishes are produced not by CNN, but rather by some financial firm(s).
The same logic applies. If those firms had any confidence in their projections, they wouldn't release the information to the public and would quickly make billions on it.
That logic sounds about right. Even though I suspect that some/many/most of those firms might make more profit (and with less risk) by selling financial advisory services (no need for a lot of their own capital!) than by borrowing from banks / other institutions and investing that money.

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