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Anyone who tells you that investing is easy, either has not done it before or is trying to sell you something. Investing is difficult. It’s tough enough to know which company to pick, let alone know how it will perform sometime in the future. However, we’ve been given a gift of sorts. Since November 2016, the stock market has seen extraordinary growth. We can use this stellar period of market growth to see if the stocks we want to evaluate have joined the party, so to speak.
It doesn’t matter why or how we got this spectacular market, only that we did. Use whatever reasons and speculations you need to help you sleep better at night. What cannot be denied is that the stock market rose substantially since the beginning of November. This rise will come in handy for this analysis process.
You could do a similar analysis in a market that hasn’t performed as well, but it’s a reasonable assumption that if we use a stellar period, this is a best-case scenario. I’ll explain later why that is exactly the scenario we want for this analysis.
Stocks Follow the Market
Most of the time, stocks tend to follow the trend of the overall market. That makes sense, since the measurement of how the market does is made up of a basket of stocks. You could limit your study to any one or two stocks in the S&P 500, for instance. But, this isn’t needed since most stocks tend to follow the market, even ones not in any index.
For this analysis, I decided to use the low point in November, right before the growth period began. The endpoint will be the beginning of March 2017. This is a high point before the market started to consolidate a bit.
Microsoft Stock Analysis
Let’s suppose we want to consider the purchase of Microsoft stock. Why Microsoft? It’s a relatively stable company. We’ll try the exercise on a company more prone to price fluctuations as well. The symbol for Microsoft in case you are unfamiliar, is MSFT.
At the starting period of our analysis (November 1, 2016), Microsoft was trading at just about $60 (close enough). What is the likelihood (without using math) that MSFT will be at $80 at the ending period (March 1, 2017)? The good news is we can check that because it’s in the past. It’s already happened!
On March 1, MSFT traded near $65. What you can see here is that in a stellar period for the market, MSFT was not able to reach the $20 gain we were hoping for. There can be plenty of reasons for this. But, its possible we were overly optimistic about Microsoft's prospects in a 4-month period.
It made a gain of $5. Is that a bad return? It depends on your perspective and your tolerance for risk. Many people would be happy with the actual return MSFT made. It represents an 8.3% gain in a four-month period. Not too shabby by most peoples’ standards.
I also checked to see if the price of MSFT was significantly higher than $65 during the measured period and it was not. At one point did close over $65, but not enough to throw off the analysis.
Facebook Stock Analysis
I did this same analysis with Facebook (Symbol: FB). On November 1, 2016, FB closed close to $130 and it went above that during the trading day. It’s conceivable to have gotten in at that price. On March 1, 2017, FB was close to $137.
The path for FB during this period was much choppier than MSFT. FB hit a low of about $115 three times during this period. Technical analysts call this a triple bottom and consider it a very bullish sign. In fact, it was right after the third bottom that the stock exploded. It went to $137 and never looked back. But, from our perspective, it represents a gain of only $7. That is, the price we started with for analysis was $130 on November 1, 2016. The price on March 1, 2017 was about $137. This is about a 5% gain.
SPY, which is an ETF representing the S&P 500, gained 14% during this same period.
At the time of this writing, FB went higher still. It is hovering around the $150 mark. MSFT is on or around $68.
What This Analysis Tells Us
The analysis suggests that should the market increase another 14% in the next four months, you may see gains in stocks of 5-8%. While it may seem bold to project returns on a population of stocks based on the returns of just two stocks, this would be missing the point. All we really want to determine is if the actual returns on the stocks we are evaluating (for the measured period) will measure up to our own assumptions, whatever those happen to be.
If you feel that you want to have a more representative sample size, feel free to continue this analysis with more stocks. Bear in mind that you won't need to do more than 30 as you have the statistical Law of Big Numbers on your side.
The 5-8% would take MSFT to between $71 and $73. For FB, that would be a range between $157 and $162.
The purposes of this analysis, is not to suggest buying MSFT or FB. It’s to set your expectations. If you believed that MSFT could have increased by $20 during this high-growth period, this analysis showed you that didn’t happen. Even FB only saw an 8% increase. Whatever stock you decide to buy, you should use this type of analysis as a frame of reference.
This analysis does not suggest, should the market continue with its current trend, that either MSFT or FB will continue higher. There are too many factors involved that are not being considered with these types of ballpark estimates. The analysis is to make a rough determination of what is reasonable to expect.
You can think of it this way, if MSFT was only able to increase by 8% when the market was strong, why should you believe that it will increase more than that amount when the market is flat or weak? That is the most you should take from this type of analysis. Nothing more.
Consider Other Periods for Analysis
It would also be advisable to see how the stocks you are considering did during flat periods and down periods. You can download prices from Yahoo into a spreadsheet and perform the same kind of analysis as above. You want to look for the minimum and maximum closing prices for the period in question. Then, observe whether the stock followed the pattern of the market (chart the prices). If for some reason, it went counter to the trend of the market, see if there were any major news releases concerning the stocks included in your analysis.
Striving for short-term gains in the market is a difficult way to invest. As this analysis shows, stocks don’t perform as well as many would like or expect.
The best course of action is to treat the stocks you buy as if you are buying a business.
That is the essence of investing. Your analysis should focus on what the business does and how it is going to make money for over the long term. Does it have a top-notch management team? And so on. Too many people treat the stock market as an ATM, and are shocked when they find there is no more cash left to withdraw!
R Programming to the Rescue!
My personal preference when doing this type of analysis is to use the R programming language. Now, I am not suggesting you become a computer programmer. You don’t need to learn the whole language in order to do this type of analysis. I like using R because it has libraries available that can download stock prices for several periods in the past. This can be done in a spreadsheet as well. I just find the subsetting feature in R to make the job much easier than even a spreadsheet. By the way, R is free to download and use. It is open source software.
On my other website, DataScienceReview.com, I will go over the basics needed to use R in performing this type of analysis. I will even include a script that you can run to take care of most of the coding for you. This way, you won’t have to learn how to code, but can still take advantage of doing analysis using R.
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