Nov

7

Years back I read a comment from Tom Dorsey of Dorsey Wright who stated that it is easier for a stock to go from $80 to $100 than from $15 to $20.

Is there an optimal price of a stock to purchase? $30 or above?

If one bought a basket of stocks at $80 at the beginning of the year, and held it for one year, what would be the performance of the basket and would it outperform the S&P index? What would the standard deviation be?

What price should an investor avoid? Below $12 or below $5? What are the reasons for doing so?

James Sogi adds:

Aside from the high/low price issue,

> 20/80

[1] 0.25

> 5/15

[1] 0.33

So it’s about 8% easier.

John Bollinger recalls:

I think the first to dip his toe in this pond was Frederick Macaulay, later of ‘duration‘ fame, writing in the Wall Street Annalist — a NYT publication — in the 1930s, the exact date eludes me.

Martin Lindkvist elaborates:

Ahh… the square root theory. Norman Fosback has a little discussion in Stock Market Logic. The square root theory says the the magnitude of the stocks price move is directly related to the price of the stock. Specifically, for a given market advance, all stocks should change in price based on their square root. So the $15 stock (square root is 3.873) would advance to 24 (3.873+1 squared) and the $80 stock should at the same market advance go to 99 (8.944+1 squared). Or so according to the theory. The gist in any case is that in during an advance it pays to have the lower priced stock which should be more volatile.

Fred Macaulay originated the theory in the Annalist, March 13, 1931. William Dunnigan’s New Blueprints for Gains in Grains from 1956 also has a discussion.

Gibbons Burke replies:

These lines from the first of the Quartets, Burnt Norton, resonate with philosophical thoughts on the nature of the markets, and the study of market history….

Time present and time past
Are both perhaps present in time future,
And time future contained in time past.
If all time is eternally present
All time is unredeemable.
What might have been is an abstraction
Remaining a perpetual possibility
Only in a world of speculation.
What might have been and what has been
Point to one end, which is always present.
Footfalls echo in the memory
Down the passage which we did not take
Towards the door we never opened
Into the rose-garden...

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