Passive indexers will say the market is efficient and few can beat it. How we look at data and especially how we determine risk is the key to successful strategies. Despite many bright folks who view the world in a macro perspective, they often under perform the market in big ways because their process depends in large part on luck. Many of the greatest stock fund managers owe their entire success to the great secular bull market.
But a closer look at markets reveal there are few efficiencies and price discovery creates great opportunities to create excess return. Transactional premiums and discounts in price are created to accommodate attitudes formed by bias and perceptions of future prospects. For example, market trends are generally viewed as either over bought or under sold. But there are examples of more complex set ups. When looked at in terms of risk or least risk participation against over bought and over sold for 2014, here is the data.
Least Risk/Overvalued AAPL
Least Risk/Undervalued GS
Most Risk/ Overvalued BAC
Most Risk/ Undervalued F
The natural inclination is to look for the least risk / undervalued stock but that is two easy. AAPL for example has had a tremendous year but there are transactional elements which continue to create a premium even though it is substantially over bought. It is always easier to effect the risk side of the equation as opposed to over bought or over sold. As such, AAPL will probably become Most Risk / Overvalued in the near future.
Data Provided by CoverRisk.com
