Stock Picking - A Nine Factor Model

Our decisions matter. We can change the world. Keynes economic prescriptions reveal that as we make decisions we do change the world.
Peter L. Bernstein, Against The Gods - The Remarkable Story Of Risk, p. 230

At the time of this writing there are 3,860 securities to pick from in Canada on the Consolidated Toronto Stock Exchange. If you live in the United States there are way over 10,000 securities to choose from on the three major markets. If you go into the pink sheets there are several thousand more to choose from. And the Oracle of Ottawa has heard that there is a ton of low hanging fruit still to be found on any given day.

Just Roll'em...

The Oracle of Ottawa cannot tell his Dear Readers from around the world, how many times he has held his fresh, new and very expensive copy of Investments by Bodie, Kane and Marcus in his left hand and his latest brokerage statement in his right hand only to be told by the standard book that what I did last month is totally impossible! Some day the Oracle of Ottawa is going to read that book and do it the "right way", but not today.

As a public service to my Dear Readers from around the world, the Oracle of Ottawa has decided that he is going to share with you basically how he picks a stock. It is a nine factor model of data that is commonly available on the internet for free. The Oracle of Ottawa has never paid for investment advice in his life, and neither should you Dear Reader.I will present my nine favorite factors with a link that will take into more detail. And some brief comments, that I have learned from having my own skin in the game for a number of years.

1./ Share Price: The lower the better! Contrary to the assumed wisdom, you will not make very much from buying Apple at over $500.00 a share. The Oracle of Ottawa has found that the sweet spot is between two to ten dollars a share. As a matter of fact my first ten bagger was on a two dollar stock. The Oracle of Ottawa loves two dollar stocks. If you are tempted to follow the crowd, ask yourself, what will double first, a two dollar stock or a one hundred dollar stock? Think about it.

2./ Price/Earnings: Lower the better. Buy a dollars worth of earnings for as little as possible. There is no law against it, and forget the textbook.

3./ Dividend Rate: The higher the better. New studies by the people of the book have recently found that that high yielding stocks do the best! Never buy a stock in a company that doesn't comp you with a nice fat rate for just waiting. Contrary to the book, high yields abound in the markets, all you have to do is discover them. And yes there are many free lunches to be had in capitalism, Who knew?

4./ Price/Sales: The lower the better. A low price sales ratio is a great indication of vigor. In Canada it is not uncommon to find price sales ratios way under 1.00. Would you believe 0.05 to 0.50 is pretty common? It is.

5./ Price/Book: The lower the better. There is nothing wrong with buying a dollar for fifty cents or even less. And contrary to the text book, these stocks are still out there in the market waiting to be discovered. So much for the Efficient Markets Hypothesis!   

6./ Volume: The higher the better. Steadily rising daily volume is very bullish from my experience.

7./ News: More positive news the better. A company with a clearly defined mission is very bullish indeed.

8./ Price/Cash Flow: The lower the better. (See the link...) The more money that is flowing through the company the better. A low ratio indicates wicked vigor.

9./ Beta: Doesn't make any difference. Beta is a lot like mutual fund performance. Past history is no indication of future performance. Trust the Oracle on this one. The Beta of a stock has made no difference to the Oracles historical performance. Don't let it get in your way.

The Oracle of Ottawa hopes that this will perform a much needed public service. And be very wary of academics who write about stocks and even win the Nobel Prize, and yet have never owned a stock in their own name in their life! Read their books for a laugh, then study the people who have actually went out and did it. You can't go wrong with those guys.

Another OLG Paradox Of Probability

In stochastic processes the future is not uniquely determined, but we have at least probability relations enabling us to make predictions.
William Feller, An Introduction To Probability Theory And Its Applications, Third Edition, Vol. I, p. 420

The Oracle of Ottawa has the grand pleasure to be a resident of Ottawa, Ontario. And in the Province of Ontario we have a wonderful organization known as the Ontario Lottery And Gaming Corporation.  The OLG is a house of many games. One of the most interesting is a sports game known as Pools. It is just like an office sports pool that you play at work, but Pools is an office pool that has as its "subspace" the whole population of Ontario! (population, 13,505,900)

Lesson? - Probability is Spooky...

  As you can well imagine, things can get pretty exciting well into the NFL football season, where by one of the most popular bets in Ontario is the weekly series of NFL games. There can be up to 16 games, from Thursday night to Monday night. For five dollars you can take your best shot, straight up, and come Tuesday, the winner(s) are announced. If you can pick 14-16 NFL games, straight up, you could turn $5.00 into several hundred thousand dollars! And it being Canada, this will all be sweet and tax free.

HP-11C - Good tools are very important...

If the Oracle of Ottawa's old brain is working correctly, The weekly NFL Pool was the first and only Pool in the Province of Ontario. Then of course came the weekend NHL hockey Pool, then the MLB baseball Pool. With a hold back of any where from 40% - 60% the good old OLG ran with a really good thing until at the time of this writing, there are pools offered every day.  Which is proper and fitting, fair and wide open.

Most of the time, the results are to be totally expected. Such as the days when 14 baseball games are on the list, and the results are that only 2- 4 people were able to pick 12 of the 14 offered games. For this awesome feat, the reward can be several thousand dollars! This, for those that know of such things, fits the normal curve about just right. And tomorrow there will another list. Now remember, this is a pool, you do not have to get all the games right, you only have to be the punter or punters that gets the most games right, result, you get all the money, Sweet!  

William Feller - Awesome beyond words...

For example, early last week, there was a card offered of a mere 10 night MLB games. If you have tried it Dear Reader, you know that handicapping MLB baseball is all but impossible. But on this day one punter in Ontario got all 10 games, and in turn took all the pool money, which was north of $20,000 bucks Canadian, great work, if you can snag it!

On Thursday last was offered Card #99, it consisted of all the pre-season NFL games from August 15, 2013 to August 17, 2013 a small list of only 14 pre-season NFL games. If you think that major league baseball is hard to cap, you also know that regular season NFL games is an awesome feat of capping prowess. But who in heavens name would be crazy enough to even try to cap 14 pre-season NFL games? Surely a total impossibility?


Then the little fridge light came on in the Oracles brain, give it a random guess, by a very possible stroke of luck, the Oracle could possibly pick say 12 out of 14 games and share the prize with say at least six other randomizers. Well it was this fine Sunday morning when the Oracle checked his ticket and discovered that he only could guess 7 out of 14. Pure text book expectation. But the Oracle of Ottawa was shocked to discover that 66 punters in Ontario were able to predict 14 out of 14 pre-season NFL games!! The odds of performing such a feat of picking 14 of 14 games are 1: 16,384! That means that about 1,081,344 tickets at five bucks each would have to be sold, more or less. For a gross pot of $5,406,720 +/-. before withholding percentage of the house take, assuming 40%, would leave a prize pool about 3,244,032, which would have meant 66 prizes of $49,152! The actual prize that was awarded to these awesome subset of punters was a mere $555.30 each!! Hmmm...

This of course means, and makes very much sense, that only a very very small subset of the population of the Province of Ontario actually played. But excuse me! Sixty six people of this small subset were able to pick all 14 of 14 winners!???  While the greatest capper in America alive today Kenneth Massey, could only manage a paltry prediction of 10 out of 14!? If one was really cynical one would blurt out that the only way this could possibly happen is if you were somehow able to buy your tickets after all the games were actually played! But the Oracle of Ottawa wouldn't think of doing a nasty thing like that....

Paradox Of The Spread

If you do know that here is the hand, we'll grant you all the rest.
Ludwig Wittgenstein, On Certainty, Section 1

In the Province of Ontario there is a game called Point - Spread offered up by the folks at Ontario Lottery and Gaming. It is offered in baseball (MLB), hockey (NHL) and football; both NFL and CFL! The "authority" assigns a value or a handicap figure to the perceived favorite of a matchup and you the punter simply have to decide if the team in question can win by more than a half point, a full point, and so on, or not. You can select from two to twelve games. The prize for picking the spread right for twelve consecutive games is one thousand times the wager. In Ontario at the time of this writing you can wager from two to one hundred dollars on one ticket. Imagine! Turning a two-ney into two thousand dollars!

Probability, even simple probability is very weird...

And in Canada it gets even better, the winnings are tax free! Provided of course that you are not doing it as a business, but only as a hobby. (If you are employing fifteen "runners" to place your tickets, odds are that you will be declared a business, so one must be careful.)

Ludwig Wittgenstein

 It is now on the verge of July. And everyone knows that July and August are nearly the two most important months of the MLB baseball season. Along with April, May, and June, not forgetting of course, September and October.... Again the Oracle of Ottawa is contemplating the fine points and eternal mysteries of the "spread". How hard can it be? Picking the correct result of the spread in a mere two games pays two times money. Two dollars becomes four dollars. There are games every day, why a really sharp person could own the world! Two events, with only two possible outcomes, Bust or Cover, gives the punter a one in four chance of doubling his money. That is like flipping two heads in a row, or hitting cold on two babes and getting their phone numbers one right after the other, stuff that the Oracle of Ottawa has done over and over in his long life with total ease. But sub in the words point spread and it might as well be infinity.   

The cold hard odds of picking the spread on twelve consecutive games is a mere 1 in 4096. Close inspection will reveal that that is one of the fairest props going. And it is fair. We are not talking soccer or cricket here. What keeps the Oracle of Ottawa up late in these summer nights is the certain knowledge that he has done far better at events with much, much higher odds. Take for example a twelve question test where there are four possible answers for each question. We now go from 1 in 4096 to 1 in 16,777,216! That is on a twelve question multiple choice quiz with four possible answers for each question, there are 16, 777, 216 ways to answer! And 531, 441 ways in which you can answer all twelve questions wrong! 

The paradox to the Oracle of Ottawa is that he can remember far more than one instance in his long life where by he has aced a twelve question multiple choice test with four choices offered for each question...Yet for the sheer life of me at the time of this writing, the Oracle still has yet to cash out on a three gamer point spread ticket. Which has the hard odds of 1 in 8, and which pays five times money. 

P.S.

Friday last there were 13 MLB games on the list. The Oracle of Ottawa focused for one more try and doped up all the days games. Then in fear that he might be becoming a problem gambler at two dollars a throw per day, put away the list in revulsion. The plan was to play two twelve gamer tickets one starting from the top and the other from the bottom of the list. Yesterday the Oracle decided to teach himself a lesson once and for all and check the results. There is no way on Earth that anyone can pick the spread results for thirteen games! Well Dear Reader you are right, I only picked 11 out of the possible 13!! If the Oracle would have played the two long shot tickets, he would have had two tickets that had 10/12 correct results, which pays 10 times money! My high stakes of $4.00 would have become $40.00... The Oracle is sure there is a moral to this story, but he just can't put his finger on it....

Failure Means You Are Just About There!

It is most important in creative science not to give up. If you are an optimist you will be willing to "try" more than if you are a pessimist.
Stanislaw Ulam, Adventures of a Mathematician, p.55

The month of March was very busy for the Oracle of Ottawa. The "Thinking About Thinking" project hit a rich vein.Yes indeed. I deployed elementary critical thought into a very elegant thought experiment, and then I postulated a very elegant hypothesis leading to a very simple lab experiment. The results were a total failure. 

Lorentz Transformation...

Many years ago when this happened to the Oracle of Ottawa he simply chalked it up to experience and moved on. This past algorithm has been wrong for all these years. This is what they teach in our schools and our universities. But, the Oracle of Ottawa had the recent self gained knowledge of the results of his intense "Thinking About Thinking" project to fall back on, this time. Instead of abandoning the idea totally, I turned the whole proposition on its head. Failure was turned into a very important, totally counterintuitive, discovery of the nature which is somewhat proprietary. The Oracle of Ottawa is still somewhat shaken at the nature of his discovery.

Quiet a lot of inspiration came from Stanislaw Ulam, and his book Adventures of a Mathematician. If you are involved or soon to embark on the creative sciences, I highly recommend it. You will find it endlessly inspirational. 

 It is the optimists that get all the glory. Even though they are not always the "smartest" or the most "gifted" people. On any given day the prize will go to the person, that will try one more time....
 

Musings On Extended Diversification

To my mind losing is always better than never trying, because you can never tell  what may happen.
Jean Chretien, Straight From The Heart, p. 195

Every year in Canada due to the two national lotteries there could be created up to 154 new millionaires per year! But due to the prizes building from week to week and not being won and then having, say, a 40 million dollar prize go to a group of 35 people, you could on average count on 154 as being a pretty stable estimate.
Now this is not counting the smaller provincial lotteries that often award prizes over a million dollars. So therefore the number of newly minted millionaires could climb to over 200 in any given year.

Is this process solvable??

Take a six column 1 to 49 drop ball lottery. The odds to beat can be as high as 1 : 15,000,000 or more depending on variations built into the game. The Oracle of Ottawa often ponders how so much randomness can be squeezed into such a small 'space'. Now essentially this is a closed process. Yet it is deemed in all the texts as fruitless to even begin thinking about a way to 'solve' this process.

William Feller - Made math cool...

I often tell any youngsters that will listen, and there isn't many, that the most exciting field they could probably enter is the mathematical field of probability. If you want to get the biggest bang for your education nickels a degree in probability and statistical inference would be a fine place to start. For a life long pursuit that will have many more doors open as the future unfolds, all very hard to beat...

Is this data random? - Can you prove it?

 For example take the old card shuffling problem. This is a problem that is still yielding really weird and totally unexpected results! Who knew? But for a mere mortal or a really sharp kid read about one William Feller!
If you can get hold of a copy of 'An Introduction to Probability and Its Applications, Volume I, just dip in any where... You will soon find why that it is regarded as the greatest book on probability ever written. Why the bit on coin tossing is still rippling through the world. Some of the stuff in that book is so weird and so totally unexpected that it is at first read just incredible.... But the best piece of gold I mined from this work is to break the process down into smaller independent processes... Try it before you scoff...

Yes, all that is all very interesting, but these games are for silly poor people and ignorant rubes... A middle class or better off person does not buy lottery tickets or bet on sports, or go to the track or the card tables at the local casino... Well not so fast! And I have a reference! You should budget a very small amount for such things! See 'Investments' by Sharpe, Alexander, Bailey and Fowler, Second Canadian Edition, Chapter 26.   
Read this carefully. You can't win if don't have a ticket!

Many professional Mathematicians have been clobbered by this one! Now do you see the power?

The Parrondo Paradox And The Office Lottery Pool

There are pairs of losing games which if played one after the other become a winning combination. Whereas you would expect the combination of two losing games in sequence always tend to lose.
Michael Clark, Paradoxes From A To Z, (Second Edition), p. 155

As any reader of this blog will now know the Oracle of Ottawa loves his paradoxes! A paradox is the tip of the iceberg that we can see over the wall of the limitations of our existence. They are very important. A paradox is proof that such useless things as the study of philosophy can be very profitable indeed. Paradoxes also prove that we don't have such a solid grasp of our respective reality's as we are lead to believe. A paradox is an indicator of all the knowledge that we are not yet aware of.

What is the optimal algorithm?

One paradox that has captured the Oracle of Ottawas attention of late is known in the literature as the Parrondo Paradox. It is the work of one J. M. R. Parrondo. I will leave it to the reader to track down all the forms that this striking oddity can appear. It is not a waste of time and you will get a lot out of it.

Back in my working days I was in a very large office lottery pool in a government office somewhere in Ottawa. The guy that ran it was old Bob. The way an office lottery in Ottawa usaully works is that you cough up some money every week. All the winnings go into a pool that is distributed just before Christmas. We had a great run with this pool. All of us shared in a prize of a couple of grand once! It was just before the closing of my first home purchase and it came in mighty handy, paying my closing costs and enabling a larger down payment that of course lowered my monthly payment. The mortgage has been paid off for a while now, but the thought of how to maximize the office lottery has kept popping up in my thinking.

J.M.R. Parrondo

If you are running a large pool or are buying a lot of tickets on a regular basis, you want to, at the least, play the most plays for the least possible amount money. A possible way to do this is to split up the number of plays between two or more lotteries per play cycle. For example in the province of Ontario there are at least three weekly lotteries that I like to take a flyer on. I think of it as "Extended Diversification". I once saw in a serious Investment text book that you should put at least a fraction of one percent of your yearly take into such bets! My combination at present is Lotto-Max, Lottario, and Ontario 49. There are not too many lotteries anywhere you could possibly win a seven figure prize for 50 cents a play! It is quite weird, but I am most always cashing winners in and keeping the over all cost down.

Isn't that just extraordinary?!