Investment Portfolio Discipline Summary
Doing this a day later than our buy review on APA Corporation (APA) revealed a bigger, credible, near capital gain prospect in San Juan Basin Royalty Trust (NYSE:SJT), Houston-located and active since 1980. Here is the comparison, using much of the prior ground already covered.
Active Investing strategy wealth-building depends on compounding gains from repeated shorter-term positions entered, closed out, and reinvested immediately. This is to keep capital continuously working, not an irregularly opportunistic hopeful trading scheme.
Reinvestment of liberated (usually expanded) capital is with choice of best informed-prospects for (1) profitable outcome, (2) worthwhile size gain, (3) happening soon, with (4) minimal interim price draw-down experiences. All of these factors are targeted in advance, based on prior experience under similar reward~risk forecasts. Portfolio management discipline uses them as operating control, particularly as to the (3) time element.
“The performance measurement fund invests in equities whenever Market-Maker hedging activity forecasts that 80% or more of the near-coming price range is expected to be to the upside and 10% or less may be to the downside.
At the time of each purchase a GTC sell order at upside top forecast price for all of those just bought shares is placed with the broker where bought. The broker’s system will monitor and direct to you the sale confirmation when accomplished, probably with encouragement for reinvestment.
At the time of the buy, only on your own personal private calendar a note is made to review this holding at 3 months after the purchase, Then, if not yet sold, but is priced at a loss, sell and put the proceeds into the reinvestment stream. If at a gain, after considering alternatives, decide to sell or move the calendar note a month further forward. Discipline matters, but should not take time from making effective reinvestment choices.
Description of Primary Investment Candidate
“San Juan Basin Royalty Trust operates as an express trust in Texas. The company has a 75% net overriding royalty interest carved out of Southland’s oil and natural gas interests (the Subject Interests) in properties located in the San Juan Basin in northwestern New Mexico. The Subject Interests consist of working interests, royalty interests, overriding royalty interests, and other contractual rights in 119,000 net producing acres in San Juan, Rio Arriba, and Sandoval Counties of northwestern New Mexico, as well as 1,140.0 net wells. BBVA USA serves as the trustee of the San Juan Basin Royalty Trust. The company was founded in 1980 and is based in Houston, Texas.”
Source: Yahoo Finance
Alternative Oil Producer Industry Investments Compared
Here are several businesses similar to San Juan Trust. Following the same analysis as with SJT, historic sampling of today’s Reward~Risk balances were taken for each of the alternative investments. They are mapped out in Figure 1.
(Used with permission).
Expected rewards for these securities are the greatest gains from current closing market price seen worth protecting short positions. Their measure is on the horizontal green scale.
The risk dimension is of actual price drawdowns at their most extreme point while being held in previous pursuit of upside rewards similar to the ones currently being seen. They are measured on the red vertical scale.
Both scales are of percent change from zero to 25%. Any stock or exchange-traded fund (“ETF”) whose present risk exposure exceeds its reward prospect will be above the dotted diagonal line. Capital-gain attractive to-buy issues are in the directions down and to the right.
Our principal interest is in SJT at location , just to the right of Devon Energy (DVN) at location  at the right hand edge of the green price growth Reward scale. A “market index” norm of reward~risk tradeoffs is offered by SPY at . Most appealing (to own) by this Figure 1 view is SJT. Figure 2 should clarify the better choice than APA..
Comparing features of Alternative Investment Stocks
The Figure 1 map provides a good visual comparison of the two most important aspects of every equity investment in the short term. There are other aspects of comparison which this map sometimes does not communicate well, particularly when general market perspectives like those of SPY are involved. Where questions of “how likely” are present, other comparative tables, like Figure 2, may be useful.
Yellow highlighting of the table’s cells emphasize factors important to securities valuations and the security SJT, most promising of near capital gain as ranked in column [R].
(used with permission).
Why do all this math?
Figure 2’s purpose is to attempt universally comparable answers, stock by stock, of a) How BIG the prospective price gain payoff may be, b) how LIKELY the payoff will be a profitable experience, c) how SOON it may happen, and d) what price draw-down RISK may be encountered during its holding period.
Readers familiar with our analysis methods after quick examination of Figure 2 may wish to skip to the next section viewing Price range forecast trends for SJT.
Column headers for Figure 2 define investment-choice preference elements for each row stock whose symbol appears at the left in column [A]. The elements are derived or calculated separately for each stock, based on the specifics of its situation and current-day MM price-range forecasts. Data in red numerals are negative, usually undesirable to “long” holding positions. Table cells with yellow fills are of data for the stocks of principal interest and of all issues at the ranking column, [R]. Cells with pink fills have dimensions usually regarded as inappropriate for buys.
The price-range forecast limits of columns [B] and [C] get defined by MM hedging actions to protect firm capital required to be put at risk of price changes from volume trade orders placed by big-$ “institutional” clients.
[E] measures potential upside risks for MM short positions created to fill such orders, and reward potentials for the buy-side positions so created. Prior forecasts like the present provide a history of relevant price draw-down risks for buyers. The most severe ones actually encountered are in [F], during holding periods in effort to reach [E] gains. Those are where buyers are emotionally most likely to accept losses.
The Range Index [G] tells where today’s price lies relative to the MM community’s forecast of upper and lower limits of coming prices. Its numeric is the percentage proportion of the full low to high forecast seen below the current market price.
[H] tells what proportion of the [L] sample of prior like-balance forecasts have earned gains by either having price reach its [B] target or be above its [D] entry cost at the end of a 3-month max-patience holding period limit. [ I ] gives the net gains-losses of those [L] experiences.
What makes SJT most attractive in the group at this point in time is its basic strength of reward to risk ratio of 2.9 to 1 in [T], the brief holding periods in [J], and the Win Odds of 10 out of every 11 in [H].
Further Reward~Risk tradeoffs involve using the [H] odds for gains and the 100 – H loss odds as weights for N-conditioned [E] and for [F], for a combined-return score [Q]. The typical position holding period [J] on [Q] provides a figure of merit [fom] ranking measure [R] useful in portfolio position preferencing. Figure 2 is row-ranked on [R] among alternative candidate securities, with SJT in top rank.
Along with the candidate-specific stocks these selection considerations are provided for the averages of some 3000+ stocks for which MM price-range forecasts are available today, and 20 of the best-ranked (by fom) of those forecasts, as well as the forecast for SPDR S&P 500 Trust ETF (SPY) as an equity-market proxy.
Current-market index SPY is not competitive as an investment alternative with its Range Index of 36 indicates 2/3rds of its forecast range is to the upside, but less than 3/4ths of previous SPY forecasts at this range index produced profitable outcomes, with enough losers to put its average in single-digit positive [ I ] result.
As shown in column [T] of figure 2, those levels vary significantly between stocks. What matters is the net profit between investment gains and losses actually achieved following the forecasts, shown in column [I]. The Win Odds of [H] tells what proportion of the Sample RIs of each stock were profitable. Odds below 80% often have proven to lack reliability.
Price range forecast trends for SJT
(used with permission).
No, this is not a “technical analysis chart” showing only historical data. It is a Behavioral Analysis picture of the Market-Making community’s actions in hedging investments of the subject. Those actions define expected price change limits shown as vertical bars with a heavy dot at the closing price on the date of the forecast.
It is an actual picture of expected future prices by experienced market professionals, not a simple hope of a recurrence of the past. Expectations are backed up by significant bets of investment capital made to protect market-makers or to earn a proprietary profit from risk-taking.
The special value of such pictures is their ability to immediately communicate the balance of expectation attitudes between optimism and pessimism. We quantify that balance by calculating what proportion of the price-range uncertainty lies to the downside, between the current market price and the lower expected limit, labeled the Range Index [RI].
A RI at zero indicates no further price decline is likely, but not guaranteed. The odds of 3 months passing without either reaching or exceeding the upper forecast limit or being at that time below the expected lower price (today’s) are quite slight.
The probability function of price changes for SJT over APA are stated in its prior experience in Figure 2. Its only weakness is a shorter history than the 5 years we normally use. But the performance of forecasts with today’s Reward to Risk balance is realistic and significant.
The multi-path valuations explored by the analysis covered in Figure 2 is rich testimony to the near-future value prospect advantage of a current investment in San Juan Basin Royalty Trust over and above the other compared alternative investment candidates.