What Does a Winner Look Like on Its Way to Becoming a Winner?

So, if you’ve been following my blog, you’ve known that I’ve done several articles where I attempt to differentiate characteristics of stocks that beat the market over a one-year period versus those that don’t (see here, here, here, here, here, here, here, and here).

For this article, I want to do the same but I’m slightly altering the definition of “winner” to be any stock that over a 365-day period experiences greater than a 100% price increase. And I define “loser” here as something more distinguishable: stocks that increase no more than 30% during that same period. We are jettisoning the effect of the market altogether because frankly, I don’t care how the market does so long as the stocks I invest in do well.

So what does a winning stock look like during this 365-day period as this period progresses day-to-day?

I. Overall Gain

Let’s first look at how their cumulative gain looks day-to-day.

Figure 1. “Bydaymedian” means each day’s median value of either the winner or loser group. The Blue line is the cumulative gain of a typical winner on a day by day basis (specifically the median cumulative gain of a winner). The redline is the losers. The green line is the lower bound of the winners, i.e. the median minus 1.5* MAD (median absolute deviation). The yellow line is the upper bound of the losers, i.e. the median plus 1.5*MAD.

The blue line above represents the median cumulative gain of a winner from day 1 to day 365. Because this is an aggregation of 1,000 trials, this median represents the median of all trials, so technically speaking, the blue line is the median, median cumulative gain line. The red line is the same but for losers. The green line is the lower bound for the blue line, where it represents 1.5 times the deviation below the blue line. The yellow line is the upper bound for the red line, representing 1.5 times the deviation above the red line.

Notice how the regions of the winners and losers overlap in the first 90 days. On day 91 is the day when the lower bound of the winner region surpasses the upper bound of the loser region. In essence, day 91 is the day when the winners officially pull away from the losers in terms of cumulative gains. On that day, the lower bound winning stock would have accumulated about 7.2% in gains, where the upper bound loser stock would have accumulated about 7.05%. At the end of the year, the typical winner would have gained at worst 127.27% in returns (147.4% median) while the loser would have gained at best 14.5% (a median of 2.36%).

So if by day 100 of investing, your portfolio hasn’t experienced a cumulative appreciation of 8.57%, it is likely that some of your holdings will likely not be winners at the end of the year.

II. Margins

What about margin gains above the NASDAQ?

Figure 2. “Bydaymedian” means each day’s median value of either the winner or loser group. The same as Figure 1 but this time we track the cumulative marginal gain, that is the amount of cumulative gain above the NASDAQ. The blue line represents the winner’s cumulative marginal gain above the NASDAQ on a given day of investing from day 1 through day 365 while the yellow represents the lower bound of the winner line (the median minus 1.5*MAD (median absolute deviation)). The red line represents the losers, and the green line represents the upper bound of the red line (the loser median plus 1.5*MAD).

As expected, the picture doesn’t look that much different from Figure 1 with the gains other than a scalar shift, representing the NASDAQ’s cumulative gains.

The day the winner region starts the pull away from the losers in the case of cumulative marginal gains is day 75, where the lower bound for a typical winner’s cumulative marginal gain would be 4.67% and the upper bound for the typical loser’s cumulative marginal gain would be 4.65%. By the end of the year, these figures would have ballooned to the following: the winner would experience at worst a cumulative marginal gain of 102.5% above the NASDAQ (or 132.6% median) whereas the loser would experience at best a cumulative marginal gain of 10.3% above the NASDAQ (or a median of 12.2% below the NASDAQ).

III. Beatpct: Proportion of Days in the Test Period a Winner/Loser Beat the NASDAQ

For this next metric, I’ll be using what I termed the “beatpct” or the percentage of days out of the total 365 days where the normalized price graph of the stock is above that of the NASDAQ. For a clear illustration of this, please refer to my earlier article here.

This is what winners and losers look like in terms of beatpct:

Figure 3. “Bydaymedian” means each day’s median value of either the winner or loser group. The blue line represents the winner’s median beatpct for each day from day 1 to day 365. Beatpct is the proportion of the total days up until a given day that the normalized price graph of a stock was above that of the NASDAQ. The yellow line is the lower bound of the winner median. The redline is the median loser beatpct while the green line is the upper bound of the redline.

The day on which the winner region starts to pull away from the losers is day 78, where the typical winner at worst would experience a beatpct of 62.1% (62.1% of the 78 days were days when the winner’s normalized price graph was above that of the NASDAQ’s) and the typical loser would experience a beatpct of 61.4%.

At the end of the year, at worst, 87.6% (a median of 93.3%) of the 365 days of investing would have been days the winner’s cumulative gains would have been better than NASDAQ. At best, 52.3% (a median of 26.6%) of the 365 days of investing would have been days the loser’s cumulative gains would have been better than the NASDAQ.

So, let’s say you’ve invested in a stock and have been following its growth closely, day by day. On day 100, you’ve discovered that your shares’ cumulative gains beat the NASDAQ’s for only 50 of those 100 days. It is likely then that your stock pick will not turn out to be a winner by the end of the year as the lower bound for a winning stock would typically experience 67 days of beating the NASDAQ by that point, instead of 50.

IV. Bonus Episode: Positive Daily Percent Change Proportion

One other metric I tracked was the proportion of days that a stock experienced a positive percent change in its price, we’ll call this the “posdpcpct”, “pos” for positive, “dpc” for daily percent change, and “pct” for percentage.

Here is what the posdpcpct looks like for winners and losers over a 365-day period:

Figure 4. “Bydaymedian” means each day’s median value of either the winner or loser group. The blue line represents the median winner posdpcpct, the green represents the lower bound of the winner posdpcpct (the median minus 1.5*MAD (median absolute deviation)). The red line represents the median loser posdpcpct whereas the yellow represents its upper bound (the median posdpcpct plus 1.5*MAD).

As you can see right away, the winner and loser regions are totally overlapping. There is no place along the 365-day timeline where the winners pull away from the losers. In other words, winners and losers in terms of posdpcpct are indistinguishable. Specifically, both groups generally experience about 120 days of positive price changes out of the year (33.2% to 33.9%), where the remainder is composed of days of no change (either through no trading or otherwise) and days of negative price changes.

Thus, the only thing to learn from this is that posdpcpct is a useless metric to distinguish a winner from a loser before the year ends.

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