Getting An Edge On Stock Prices

We often have a genuine concern about what others think. We want to be self-adjusting towards what society thinks. It is risky to be far out of step. That is particularly true with investing.

If we could get ahead of what others are thinking, it would be helpful in our purchase and sale decisions.

The value of an investment is a two-sided thing.

One side deals with the nature of the business itself. Essentially its stock value arises from its future prospects of creating cash flow and value. That is often called fundamental value. It is affected by competition, management strength or weakness, cost of production, and a dozen other factors. You can determine a numeric value and explain why that number is right based on the factors you have studied.

The other side is how others will estimate the value of the same stock. Some of it will by assessing objective factors differently. Still, most of the differences will relate to the changing environment where the business operates and how people evaluate the meaning of those changes. If people are generally depressed about the future, you should expect stock prices to be lower.

Can you anticipate or learn what they’re thinking?

You can get a sense of what people are thinking. Some of that will help you understand whether facts are viewed from a pessimistic or optimist perspective.

There are places to look.

The Conference Board maintains several indices monthly. The Confidence Index (jobs and inflation) is one. As you would expect, it is lower in June than in May. 98.7 versus 103.4. down 4.5% in a month. Retail spending is down, too

30% of people think business conditions are worsening. The “Confidence Index” fell to 66.4 from 73.7. That’s a 10% drop. People are moving away from optimism, affecting what they will pay for an investment. You should expect stock prices to remain the same or fall.

Of course, something could change, and it will repair itself. Did you nod your head and say, “That’s likely.”? Maybe not.

CPI or PPI. We see the consumer price index and find it up 8% or more year over year. What does it tell us about the future? Not much unless you study why it is up. The PPI will tell you a little all by itself. The producer Price Index is the cost increase faced by people who supply goods and services to the market. How much is it up? It is surprising.

If you listen to politicians trying to blame others, you’d expect to find producers have greedily raised prices and are taking advantage of a challenging situation. Listening to politicians can mislead you. What if you knew the PPI was up almost 11%? Their costs are rising faster than their prices. Do you think they will raise prices eventually to recover their higher costs? I do. Are the politicians lying to you? Probably, or, in their defence, they think it is accurate, and no one has passed on the facts yet.

The CPI numbers are not ready to fall just yet.

Changing how the government calculates inflation could make the numbers look better. If they used 1972 measurement methods today, inflation would likely be over 20%. You should expect some changes. Trust but verify, or don’t trust. Either works.

The Institute for Supply Management has helpful information too. Many businesses derive value from it.

Successfully predicting the future is a big deal.

It just isn’t easy. Think how slight the advantage could be before you win big. Do you need a time machine that shows you the future a year from now? That would be nice but unnecessary. You could do well with just a tiny glimpse of the future. If I had a time machine that would show me 5 minutes into the future, I would spend a lot of time at the pari-mutuel window at a racetrack or at the Pass Line at the craps table in a casino.

The bits to take away

Even a slight edge can produce sound results. Try to add to the factors you can use. You need not be exactly right if you get the general idea of the future right. Part of that helps you avoid mistakes.

Go looking for Indicators about the future, keep in touch with them and change your behaviour as the people side of value changes.

I build strategic, fact-based estate and income plans. The plans identify alternate ways to achieve spending and estate distribution goals. In the past, I have been a planner with a large insurance, employee benefits, and investment agency, a partner in a large international public accounting firm, CEO of a software start-up, a partner in an energy management system importer, and briefly in the restaurant business. I have appeared on more than 100 television shows on financial planning. I have presented to organizations as varied as the Canadian Bar Association, The Ontario Institute of Chartered Accountants, The Ontario Ministry of Agriculture and Food, and Banks – from CIBC to the Business Development Bank.

Be in touch at 705-927-4770 or by email at

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