After stocks plunged in January you had a workout on the old mental treadmill.
You knew stocks were going to fall. It had to happen, they had climbed so high in the previous 10 months.
Just like you knew Google was going to soar after its IPO in 2004; and you knew bank stocks would get crushed in late 2008 because you sensed there was an awful lot of misunderstood risk out there.
Yes, the clarity of hindsight is painful, but deep down we know we didn’t really have the insight of a fortune teller -- unless our name happened to be Warren Buffett.
So, placing a valuation on stocks is difficult at best and even if you long ago dismissed the idea of stock picking, a new stock valuation tool may at least help elevate discussions with clients.
OCE Interactive launched Market Topographer this week after its team spent six years studying the issue of stock values in depth.
“It’s amazing how few people can articulate what’s driving the differences in valuations,” said Jonathan Greenberg, OCE’s co-founder and chief executive officer.
Greenberg, a Wall Street veteran who started his career at Salomon Brothers, saw the sky-high valuations during the Internet bubble and became intrigued with the real factors that drove multiples and, just as important, why those drivers change over time. He said he became fascinated by how people would naturally compare stocks in their portfolio to other stocks from the past (such as valuing Google today because its circumstances look like Microsoft’s from 10 years ago, for example.)
“There really are no true comparables,” he said, which is a problem Market Topographer addresses.
A combination of fundamental and behavioral analysis, the tool includes 12 core risk assessments, including dividend payout ratio and growth expectations. One feature that Greenberg said will be especially good for advisors is called “Based on Experience,” which attempts to determine a stock’s long-term growth expectations and the multiple that the market is willing to pay for that, Greenberg said.
Market Topographer does look pretty interesting, but the idea of evaluating stocks isn’t a new game. Stock valuation has been around in some form as long as, well, stocks. And there are indeed a slew of methods, and online calculators ready to help.
One stock research company that has its own proprietary method that is purely quantitative is Zacks Investment Research. Steve Reitmeister, an executive vice president for the company, said its method is based on the premise that posting better-than-expected earnings will lead to outperformance. The twist for Zacks is in not waiting for an earnings announcement, but rather predicting beforehand which companies will surprise.
So far, this method has been pretty successful, with Zacks’ top picks posting a 28% annual return since 1988, Reitmeister said.
Whether you try to pick winners or simply consider yourself an indexing fan, there is one piece of advice from Greenberg that you should heed: advisors must elevate their discussion with clients.
Investors have access to a slew of information and many of the same tools that advisors have. And, after the financial crisis, investors might not be inclined to be as sanguine as they have in the past.
And most are probably worn out from running on that mental treadmill.