Summary
- The evaluations for all 3,000+ including MSFT come from price range forecasts made daily by Market-Makers, far better than most non-pro investors when future stock prices are the question.
- There both Risk and Reward are seen the same way from one stock to another, seen as future changes in share prices.
- Ranked comparisons between stocks are accomplished by having actual market outcomes of prior forecasts for each stock which in prior times had the same risk-reward balances as today.
- MSFT is a stock regularly volume-traded, with daily-updated professional analyst price-range forecasts - surprises unlikely next few months.
- Extensive history of forecasts for MSFT is available for comparisons with self and with alternative investments at this time. Best defense often is a good offense.
Investment Thesis
This article was prompted by a Seeking Alpha writing contest designed more to learn what readers might find interesting about inflation-laden investment environments than to realistically learn what specific stock or stocks might behelpful to readers. Good idea for SA, and maybe for readers.
I took that latter twist of the opportunity aimed for investors and compared the coming price prospects of $Microsoft(MSFT)$ with those of over 3,000 other potential investments exposed to the same high inflation scene.
So, I misjudged what SA wanted and found that different considerations were needed than writer speculation about what might occur to investments during a high-inflation period. "Fundamental" notions ultimately are converted into comparable value judgments by the experienced and well-informed investment professionals employed by the market-making firms.
Most individual investors lack the education or experience to be comfortable in judging economic outcome impacts on portfolio candidates. You may feel you know which holding needs to get the boot, but which is the best replacement candidate? Where is there some helpful guidance?
Source of Forecasts
Institutional investing typically involves the maintenance of at least multi-million-$ portfolios, often even multi-Billion-$ ones. Meanwhile, the individuals comprising the rest of "the investing public" are efficiently served by markets operating from a computerized system of automated matching equity transaction servers.
Individual investors' presence has contributed greatly to the competitive arena in which many smaller transactions are being handled without human intervention. This has now removed the 20th-century need for competitive brokers to impose any "trade commission" costs.
But the Institutional Investment transactions are far too large to be handled systematically, so they require negotiated, disruptive, special "block-trade" transactions. Such volumes typically rarely find "other side of the trade" sellers providing enough shares to adequately fill the buyer's orders.
So the Market-Making negotiator of each deal usually is motivated to find lenders of shares (for a fee) to be delivered to the buyer as the block-trade is "filled" and reported to the remainder of the investing public via the exchanges. MMs in such loans are on call by the lenders to return borrowed shares without advance notice.
For such loans to take place, the MM must have the risk-shelter of a hedging deal protecting against rising prices while being short. The derivatives markets provide this kind of "insurance" for the MM, at a price covered by the trade initiator as a "cost of liquidity" and under terms dictated by the protection seller defining the action's value. All these inputs define, under the inescapable rules of arbitrage, the subject stock's coming price limits (higher and lower) seen most likely by the negotiating transactors.
Such negotiations and transactions make up the large part of "the market's" trillion-$-a-day equities volume. Records of their negotiating implications have been kept privately by us for decades and will be drawn upon in this discussion. Here, in Figure 1, is the current picture of how a once-a-week multi-month price range forecast record for MSFT now looks, occurring over the past 2 years.
Figure 1
Many investors confuse any picture of time-repeating stock prices with typical "technical analysischarts" ofpaststock price history. Instead, Figure 1's vertical lines are a daily-updated visual forecast record of price range limits expected in the coming few weeks and months.The heavy dot in each vertical is the stock's closing price on the day the forecast was made.
That market price point makes an explicit definition of the price reward and risk exposure expectations which were held by market participants at the time, with a visual display of the vertical balance between risk and reward.
The measure of that balance is the Range Index (RI). Here, only 26% of MSFT's full forecast range is a downside from the current $280, leaving a much larger 74% of the range to the upside.
Having such precise price expectation measures makes it much easier to make direct comparisons between all securities at each point in time, same as are now done in Figure 2.
And an advantage of these forecasts is that they are all being made by market participants on both sides of the trade having "skin in the game" at each turn at the trading "table".
Credibility of Forecasts
The row of data between Figure 1's pictures contains in addition to the price range forecasts and RI measures a history of market price outcomes subsequent to all prior daily forecasts of the past 5 years which had RI risk-reward balances like those of today.
Here, there have been over 300 such forecasts, nearly a quarter of the 1261 daily events. The average price change experiences shown for MSFT have a high degree of credibility. Other stocks may be at different RI stages of their risk-reward balance.
Comparisons with Other Stocks
Figure 2
Upside price rewards are from the behavioral analysis (of what to do right, not of errors) by Market-Makers (MMs) as they protect their at-risk capital from possible damaging future price moves. Their potential reward forecasts are measured by the green horizontal scale of Figure 2.
The risk dimension shown is the most extreme points of actual price draw-down recorded while being held in the previous pursuit of upside rewards similar to the ones currently being seen for that stock. They are measured on the red vertical scale.
Both scales are of percent change from zero to 25%. Any stock or ETF whose present risk exposure exceeds its reward prospect will be above the dotted diagonal line. Our principal interest is in MSFT at location (10) and its relationship with others.
The recorded histories of price range forecasts make it possible to understand how well each security forecast has performed in subsequent markets. It also reinforces under what risk-reward balance circumstances better forecasts were able to be made in the past, and as in Figure 1, may be made at present for the future.
Specific to today's MSFT coming price-range forecast, the derivative contracts employed in the forecasting deal dominating the current equity market at this date are unlike the perpetual stock instruments in that they all have time limits to their effectiveness. So the hedge has a limited life, as must the price-range forecast.
Rather than this being a limitation, it is a strength. Each forecast combines the prospect for gain but also the realistic extent of likely loss of capitalwithin the time horizon of the forecast.An increase of that loss potential in a shorter time warns of the potential need to replace a favored investment with a better alternative investment holding before a painful surprise arrives.
But not too soon. Change should only be made when an alternative can compete with the favorite holding on the same forecast-time terms. Still, it is necessary to be on the continual lookout for viable and desirable replacements. The restricted time horizon forces more frequent forecast review, which should reduce surprises.
The enormously changed portfolio management economics of today's investment scene greatly favor this kind ofActive Investmentmanagement. Elimination of trade "commissions" when decisions are undertaken by the portfolio's owner and executed by command via an automated transaction system through the internet now favors this kind of constant review.
One of the most painful, yet avoidable, losses is the loss ofinvestable time.Examples are due to changes in technology (Eastman Kodak, IBM (IBM)) and in corporate management (General Electric (GE), General Motors (GM)) where sleepy, "conservative" long-term passive investment management allowed years of inactive review and declining value to be lost without any possibility of replacement. More examples continue today.
Figure 3 shows the opportunities existing in just the 30 well-known and closely-followed (past-performance) Dow Jones stocks, including MSFT. When forward-looking price-range forecasts of both upside and downside limits are available frequently for comparisons, then the alert investor can take advantage of the best guidance available, on terms compatible with her/his particular situation.
Figure 3
In Figure 3, the left-most forecast price-change range column is MSFT, the least-exposed price drawdown DJ stock at today's expectations, and is among the best-gain prospects. The right-most column is Boeing (BA) with the best upside-change gain hopes, but a non-trivial risk exposure.
Regular weekly checking of how the best-informed (institutional investors') coming price range expectations forecasts are changing keeps on top of likely value growth. Seeing the balance of reward-risk ratios changing favorably, the odds of profitable investment position closeouts growing, and lengthening histories of increasing Compound Annual Growth Rates (CAGR) from shorter average holding positions, all are desirable goals.
Conclusion
Comparison of the coming price prospects of Microsoft Corporationwith those of the 29 other Dow Jones stocks supports its desirability as a top-ranked equity investment in the coming weeks and months of a likely high-inflation environment.
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