In Abayonomics which is, an insight on the behavioural patterns of stocks according to Abayomi Obabolujo, there a few laws that prices of stocks at any point time adhere to you. Whether you are conscious of these or not, they remain truth. Let us consider a few here.
ABAYONOMICS’ SECOND FUNDAMENTAL LAW OF EQUITY PRICE MOVEMENTS
The second fundamental law of equity price movement states that the price of stocks can decline from a height but can also over time, recover all the lost ground and surpass the former heights ever attained. Technically, this is the essence of a periodic capturing and analysis of the low and high prices of stocks.
THE CASE OF GUARANTY TRUST BANK PLC:
Below is Guaranty Trust Bank plc’ line graph, showing performances at five years’ interval, between January 06, 2003 and January 06, 2018. What does the graph says about its price?
- Between June 01, 2002 when price was 05 and June 01, 2006 when price was N9.06, there was a growth of over about 50%. This infers that price movement of stocks that will eventually win will not probably gyrate from the word go, such stocks do always follow normal market condition. They might be slow in the first few years, please follow through for as long as the company is performing in earnings.
- Between June 01, 2006 when the price was 06 and June 01, 2008 when the price had climbed to N30.80, there was a growth of about 240%. Notably, the market became bullish particularly in 2007 to 2008. Please note that there was a high of N40.76 on March 5, 2008 before the market crash of the same year.
- By June 2009, the stock price had fallen to 20 or a decline from the price level of June 2008 of about 54%. Significantly, it suffices to note that there was a low of N7.90 on January 28, 2009. If that point is to be captured relative to the highest price of N40.76 up until that period, there was a decline of 80.62%. A quality stock can still lose almost to shedding all its value. This infers that price is nothing more than what the market is willing to offer. In a good market, fantastic prices are offered, sometimes, beyond what the company in question is worth. When the market becomes bad, in the same vein, the market can offer far below the worth of a company.
- Between 2009 June when price was 20 and 2012 June when price was N15.19, price was within same range. Notably, this was also a period when the market was trying to find its level after the crash.
- By 2013, from the price as at June 2012, there was a growth of 100% as there was a high of N30:00 on May 30, 2013. Thereafter, the stock price was within same range till 2015.
- By January 16, 2016, the GTB’ stock price opened at 05 or a decline of 59% from N31.88 which was the high of 2015.
- Between the open of 05 on January 16, 2016 and high of N57:00 attained on January 22, 2018, there was a growth of about 337%. This infers that when a stock is attaining higher price levels, from the previous lowest point, percentage growth that surpasses previous performance is also possible.
From the above, the following is clear.
- The quality of a good stock is not in its not experiencing a decline in price but in its capacity to rise after every decline, to surpass previous heights. When you discover such stock, hold on and ride for profit.
- Invest in stocks and let time enrich you because it is time that enriches in the stock market and not gyrations. Investors who target gyration can only be likened to a lazy footballer who will not work but just stays on a corner waiting for a quick kick to score goals. Such might be lucky a few times but not all the time. Gyrations will come and go but time remains. The bull will always hand over to the bear and vice versa, the investor who stays with a good stock will emerge winner at the end. just target the good stock and wait!
- See value. No matter what stock prices might be doing under any market conditions, follow earnings’ trend, keep tab on innovations within an organisation. See value, follow value, and invest in value. You will ultimately win.
ABAYONOMICS’ THIRD FUNDAMENTAL LAW OF EQUITY PRICE MOVEMENTS:
The third fundamental law of equity price movement according to Abayomi Obabolujo is akin to the second and it states that ‘the current price of a stock only oscillates within its previous low and high prices until either it is broken to form another- new high or low price.
Dwelling more on Abayonomics’ third law of stock price movement, it infers that at a current price of a stock, the previous low price forms the calculated risk being undertaken at that point in time while the previous highest price is the opportunity. At that, it behoves on every investor to consider and measure this variance before an investment in stock is undertaken in any market condition.
It suffices to also state that when a previous low price is broken, the risk becomes higher and short term recovery, somewhat difficult as such stock is bound to now oscillate between the new low and previous low as against previous low and high. Arriving at such level, until the previous low is eventually broken, journey towards previous high cannot be embarked on. In the same vein, when a stock price breaks through a previous high, it oscillates between the new high and previous high until previous high is broken. A simple understanding of these little concepts does not only guarantee good returns but also reduces panic in equity investment. In effect, declining equity prices should instruct on certain strategic moves as elucidated below.
- The best stocks to invest in are not so much those whose prices are resilience by staying up and never look down but those whose prices possess the ability to recover to former height no matter how low it came, or how long it takes to recover. The real returns in equity investment are the intrigues of price vacillation and not stagnancy.
- Any stock with lower low status will take a longer period to return to previous high. If you are holding such, the better to ask if you will live long enough to witness such a recovery. How to help yourself is to invest in that same stock at that lowest price to dilute average cost. Thereafter, wait. The condition precedence to re-investment to dilute price is the relationship between current low price and earnings.
- New high prices are always very difficult to maintain hence, don’t sleep off when your holdings arrive at such a status, if you can, take at least, a portion of your profit.
- If you are lucky to have invested at a good price and a higher high is being achieved, why the panic? Allow your profit to run.
- Please note the factors behind a price rise because high price sustenance will always be a function of factors behind the rise. When a price is rising just on information, appreciation will be short-lived until when such information becomes handy. Between information and reality, anything can change. If you missed a rally on information, please stay off as joining such rally could be brutal. On the other hands, if price growth is premised on strong earnings, short term profit takers, bargain hunters or those investment sharks will sure shake price growth in an attempt to push it down in the short term but such is the price that will be sustained going forward. At that, no panic is required if you are an existing holder. As a matter of fact, when short term profit taking pushes such prices down, you can even invest more and wait because in the long term, the price and earnings, with other basic fundamentals of a company, if positive will experience symmetric movements. And if you were not in the stock, you don’t necessarily need to join the rally particularly if the margin between the previous price and the rally is high. Trust the market, even with good earnings, price will still, after a rise, adjust down first before the final rally up. Wait for such opportunity to invest. Need I tell you more?
Riding with Volatility for Profit:
Either for the long or short, medium or day trading, investing in stocks is all about making money. When stock markets or equity prices gyrate however, rather unfortunately, except for an extreme few or a fraction, most investors lose even when they set out to make money. Knowledge is the key. My study of investors’ psychology over a period of twenty five years has revealed to me that it is possible to make the best in and of all market sessions but it is often not so. Even the bullish of markets, most times, do leave the best of market enthusiasts with marginal returns at the best. The reason is not far-fetched. Most investors either don’t understand volatility or don’t know how to ride to profit with it.
WHAT IS VOLATILITY?
Investopedia simply describes volatility as the amount of uncertainty or risk about the size of changes in a security’s value. A higher volatility means that a security’s value can potentially be spread out over a larger range of values. This means that the price of the security can change dramatically over a short time period in either direction. A lower volatility means that a security’s value does not fluctuate dramatically, but changes in value at a steady pace over a period of time. In simple term, volatility is the rate of change or dispersion in the prices or values of stocks.
At any point in time, equity prices are no unidirectional objects. Seeing therefore that prices are not meant to be stagnant, riding with the rate of change in prices at interval is that which provides the required returns in stock prices. As a matter of fact, to a large extent, that is where the market maxim of ‘buy low and sell high’ derives its source. How does this play out?
When the bull, irrespective of capacity or length hits the market, from low prices, there comes the gyration stretching days and weeks to, in the process, fetch phenomenal returns. At that, previous past price barriers are broken. As far as I am concerned, I am of the school of thoughts that support and believe that profits should be allowed to run when gyration comes instead of quick bail out. Volatility thereafter comes into session, such that the equity price that has been in a one-sided gyration comes to a halt, sheds some, recovers, gain a little, loses again and continues until another key stimuli to determine price direction for another stretch. This is where the men among investors are separated from the boys. How? The boys among investors will sell off and hold cash, waiting for such a period again when an elongated stretch might be in session. Such are those that do push the market into recession. The men among investors will rather trade with volatility to sustain market upbeat tempo and in the process, make good returns.
- To make the best of volatility, look for volume, deals and value. The more of these you can lay hold on the better for you. Need I tell you that such are only possible in our market among the banks? That is why I strongly believe that bank stocks hold the ace for the best ride with volatility for profit. Access, UBA, FBNH, Guaranty, Zenith, FCMB and Fidelity and some others present huge opportunities. Other bank stocks could be added to the list. Irrespective of regulation, bank stocks still own the market.
- A number of insurance stocks which include NEM, Continental Reinsurance, Axa-Mansard and a few others could be strategically considered.
- Look for short term margin. There you see the short term low, range and high; the support and resistance.
- Ensure positive market mood and perception of individual volatile stocks.
- Ride with market leaders. Retail investors don’t determine prices of stocks but the big funds. If you are able to know where and what they are looking at, the better.
- Technical analysis tools will always come to the rescue.