Claims:We Claim:
1. A method of investing in a market, said method comprising;
a. identifying at least one stable value item of trade in the market
b. identifying at least one altered value item of trade of the stable value items of trade
c. determining an amount of money to be used to purchase an interest in the altered value item of trade;
d. buying the interest in the altered value item of trade; and
e. selling the interest in the altered value item of trade after a predetermined holding period of time.
2. The method of claim 1, wherein the item of trade includes a security.
3. The method of claim 2, wherein the security includes at least one share of common stock.
4. The method of claim 2, wherein the item of trade includes a derivative security.
5. The method of claim 1, wherein the value includes a price per share of common stock.
6. The method of claim 1, wherein the altered value is a current value per unit in the item of trade.
, Description:Technical Field of the Invention
The stock market is the interplay between vast numbers of buyers and sellers, is an “efficient” market in which the laws of supply and demand ultimately determine the price of the stock.
Background of the Invention
If there are more buyers than sellers for a stock, the price of the stock will rise. If there are more sellers than buyers, the stock price will fall. Proponents of the efficient market theory believe that, since all market participants have access to the same information about a stock, the price of a stock should reflect the knowledge and expectations of all investors. Thus, an investor should theoretically not be able to beat the market since there is no way for the investor to know something about a stock that is not already reflected in the price of the stock. For that reason, stock prices move in a random fashion as new information comes into the market and is quickly reflected in the stock price. However, market efficiency assumes all market participants behave in a rational fashion all the time. Unfortunately, the human condition that ultimately decides stock prices does not lend itself to full-time rational thinking.
About stock prices as a result of overweighting recent events. Of course, buying a stock that has fallen sharply will not make anyone money if it stays down forever. That is why contrarian investors must also depend on the concept of “mean reversion” or “reversion to the mean.”
The world around us, such as weather patterns, people's emotions, societal behaviour, etc., tends to track some level of equilibrium, a steady state or mean. Occasionally, this steady state is disrupted. In the case of weather, tornadoes, hurricanes and floods occur. In the case of societal behavior, riots and looting occur. In the case of human emotions, the peaks and valleys caused by big events, such as marriage, children or death, occur. Indeed, in terms of thermodynamics, it requires too much energy for things to stay at the extremes. As the energy that created the extremes dissipates, things tend to revert to their steady state. Thus, in the short term, things have the ability to run to extremes. Like a rubber band that stretches and contorts when pressure is applied but returns to its relaxed state once the pressure ceases, over time things tend to revert to a state of equilibrium, the long-term average or mean. Therefore, reversion to the mean occurs because it is not natural for things to exist forever at their extremes. At some point, things tend to revert back to their mean.
Just because a stock declines sharply in one year, however, does not make it an automatic candidate for success the following year. That point has been reinforced by the experience with technology stocks in recent years. To be sure, mean reversion/contrarian investing is not as simple as going out and buying any “under-valued” stock. Indeed, bankruptcy is the bane of any contrarian investing strategy by stealing the time a stock needs to revert to its mean. Thus, one must identify those stocks where reversion to the mean is most likely to occur, such as stocks that have a long history of weathering economic ups and downs and stocks with an ample long-run trading history. For that reason, stocks that seem best situated for a mean-reversion strategy are large, seasoned, time-tested companies with sound finances and the ability to weather down cycles in the economy and stock market. When these stocks show extreme price declines or altered value, especially relative to some appropriate benchmark or stable value, smart investors buy.
Object of the Invention
The present invention is related to a system and method of investing in a market.
Summary of The Invention
In particular, the present invention is related to a system and method of investing in a stable value item of trade in a market having a relatively stable value over a predetermined period of time and which has recently demonstrated a deviation from that stable value to an altered value, referred to herein as an altered value item of trade.
The exemplary embodiment includes a method of investing in an equity market. A disclosed method includes identifying a plurality of stable securities in the market. The trading level of each of the stable securities indicates an ability to substantially resist a negative change in the market in relation to other securities in the market over a predetermined time period. The method also includes identifying at least one most altered value security from the plurality of stable value securities having a current trading level that is substantially different than an average trading level of that stable value security. The method further includes determining an amount of money to be used to purchase an interest in the altered values security and buying that interest in at least one most altered-performing security. Finally, the method includes selling the interest in the most altered-performing stable security after a predetermined holding time period.
This process then repeats for as long as the investment strategy is implemented. In other exemplary embodiments, an investment strategy uses stock options and exchange-traded funds instead of common stocks to create the portfolios. Alternatively, the investment strategy can include the use of a ratio of stock price to two-hundred day moving average price of that stock in order to determine the most altered value item of trade.
The average trading level or stable value of an item of trade includes the average price of the item of trade such as a price per share of common stock over a predetermined time period .The current trading level or altered value of an item of trade can include the price of the item of trade such as a price per share of common stock after that predetermined time period has expired.
In one exemplary embodiment, the stable value items of trade include stocks in an index. The stable value items of trade demonstrating a substantial deviation from their stable value relative to any deviation in value or altered value of the other identified stable value items of trade are considered for investment. The stable value items of trade are compared to one another to determine the stable items of trade that have an altered value that is substantially different than the other stable value items of trade. The comparison is based on data such as percentage change in value at distinct points in time separated by a predetermined period or in the average price per share over a predetermined period. The value can be represented by the price per share of common stock, a price per option to sell or purchase a certain number of shares of common stock within a time period, or any other suitable valuation of an interest in the item being traded.
Under the embodiment, the current trading level or altered value of the item of trade can be above or below the average trading level or stable value of the altered value item of trade. The method can include identifying a plurality of most altered value securities, in which the difference between the current trading level or the altered value of the item of trade and the average trading level or stable value of the item of trade identified as the most altered value item of trade can be greater than the difference between such trading levels or values of the identified plurality of stable value items of trade.
The investment or amount of money to be used to purchase an interest in the identified altered value items of trade includes dividing the amount of money in relatively equal portions between the identified items of trade. The investment can be divided among the identified altered value items of trade based on the extent to which the altered value is different from the stable value of the item of trade in relation to the other identified altered value items of trade. The greater the deviation from its stable value, the greater the portion of the investment allocated to that altered value item of trade.
Brief Description of Drawings
FIG. 1 is a flow diagram illustrating the steps of an investment method of one embodiment of the present invention.
Detailed Description of Invention
FIG. 1 illustrates one embodiment of the present invention that includes a method for investing in a market. The steps of this embodiment include a first step of identifying at least one stable value item of trade in a market. A second step includes identifying from the previously identified stable value item of trade at least one altered value item of trade with a value that has deviated substantially from its stable value over a predetermined period of time. A third step includes purchasing an interest in the altered value item of trade identified in the second step. A fourth step includes holding the interest in the identified altered value item of trade for a predetermined holding period of time at least twelve months. A fifth step includes selling that interest at the end of the holding time period. A sixth step includes identifying at least one altered value item of trade that has deviated substantially from its stable value over the holding period of time. It should be appreciated that steps form a cycle that can repeat indefinitely.
The first step of the investment method includes identifying at least one item of trade such as stocks, options, or any other items traded in a market having a substantially stable value. A substantially stable value demonstrates a high level of stability such that any deviation in the value of the item of trade or altered value tends to revert to a mean or stable value. In other words, the value of the item of trade is so well established that a return to a stable value following a deviation from that stable value is reliably predictable.
The investment method of the invention is preferably applied to items of trade such as stocks that have a calculated value that demonstrates long-term stability or equilibrium and have characteristics that indicate that the stock will survive changes in the economy and the market so that a short-term deviation from an equilibrium will eventually result in reversion to that stable value mean stock price. Stocks that are so stable that their price tends to indicate trends in trading in a market are often candidates for an index of activity of the market. Therefore, one embodiment of the invention includes identifying stocks used in an index of a market as candidates for investment.