According to Bloomberg the worlds top tech stocks have gained $1.7T in value in the beginning of the year…….
I sniped the image below from a piece that charted Amazons remarkable rise. The rest of the chart set can be found here.
Source – recode
The reason I was drawn to this chart and not the others in the series is because if touches on a theme that I rabbit on about constantly – the need to adapt and to avoid irrelevancy. What interests me about this is that Walmart has effectively gone nowhere since the turn of the century. Yet despite the obvious power of this metric they have allowed themselves to be effectively marginalised, as no doubt have the majority of other US big retailers. If you understand anything about the demographics of the US you will now that there will always be a portion of society that will shop at institutions such as Walmart but that population will shrink and the dell of the great American Mall is already occurring at a remarkable place as they are displaced by the juggernaut of online shopping.
Such a shift does raise the question as to what could be done by traditional retailers to avert the slide and my guess is that there is nothing that can be done. However, the bigger question and the one that is relevant to everyone is why did they not see the change as it was occurring? What blinds us to the obvious in our own lives? To this I dont really have an answer I have a few guesses and they revolve around the paradox individuals being so narcissistic that they cannot perceive anything other than themselves ( a function of people who take endless photos of themselves). Or people being so uninvolved in their own lives that time and events merely wash past them.
But these are only guesses based upon my own observations. These observations are naturally tainted by I own blind spots.
One of the intriguing quirks of financial history is that the Dow Jones Index has become the benchmark of the health of the US stockmarket and by extension a metric everyone else is fascinated in.It is interesting that the Dow has become this because of its strange mechanism of calculation and is somewhat anachronistic view of the world. In many ways it is little more than a favourites index or watchlist and this becomes apparent when you look at the quirks in its construction. If you look at the S&P/ASX 20 you see that it is what is known as a capitalisation index – that is the biggest companies have the most heft within the index. If you look at the table below you can see the market capitalisation of its components along with their weighting within the index.
In this sort of index size counts but that is not the way the Dow works. Below are the relative market caps of the Dow components.
You can see that Apple with a market capitalisation of $675 billion dwarfs everyone else – it is simply enormous. However, something odd happens when you graph the weightings of the components.
Goldman Sachs with a market capitalisation of only $95 billion makes up almost 8% of the index compared to Apples 4.45%. So a stock with a market capitalisation that is 14% that of Apple has a weighting just short of twice that of Apple. It is an odd thing when history overtakes common sense.
I came across this piece the other day. It is a good bit of work because it highlights neatly the interplay between returns, risk and drawdown. This triumvirate holds sway over the trajectory of our investing but it is continually ignored by most, as all traders in some way shape or form seek the biggest bang for their buck. The article looks purchasing AMZN from the perspective of a buy and hold investor and it would have been truly stomach churning experience – I can only think of one person who would have done that and it is Jeff Bezos the founder. I thought I would redo one of the charts from the article so the scale was a little clearer.
The chart below looks at the value of $1 invested in AMZN.
What I want to highlight is the decade long wilderness between 1999 and 2009 before the stock makes a new high – this is a very long time between drinks. It is a given that simple risk mitigation procedures such as having a stop ameliorate some of the problems generating by buying and holding and for simple curiosity I thought I would look at how having a simple 52/26 week entry and exit signal would perform. The rules are simple you enter on a 52 week high and sell on a 26 week low. To put this idea under a bit of stress I made the conditions for entry and exit disadvantageous by requiring the buy to be at the high following and the exit to be the low of the following week. The system not surprisingly only generated a few trades and they are as follows –
You will note that I have only looked at absolute dollar and percentage gains based upon purchasing a single share. So it not a truly exhaustive systems test by any stretch of the imagination. What did surprise me was that it only generated a single loss and that the stock has had a near triple digit gain whilst quite mature. The old adage price is irrelevant holds true.
There are probably two points to be gleaned from this. Tales of survivor bias that you hear from buy and hold investors do not reflect the true story because for every AMZN there are probably another ten that at best go nowhere or at worst simply disappear. This is particularly true for stocks that made their first appearance during the Dot Com bubble. And simple ideas work surprisingly well.
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