Indexes might be relatively efficient but underneath it all is something different. Individual stocks can fluctuate quite a bit in a matter of a year. That was the basis for Graham’s argument in the last post for using certain criteria to profit from those moves. Mr. Market can quote ridiculous prices for individual companies and it happens more often than you might expect.
Well, curiosity got the best me. I did some digging to see just how much stock prices fluctuate in a given year.
I settled on the S&P 500 stocks (via Wikipedia since the ticker symbols were readily available), dropped it into a spreadsheet, and pulled the data from Google Finance. For the record, there are currently 505 stocks, from 500 companies, in the S&P 500.
Here’s a quick breakdown that should give you a general idea of the range in stock price moves over the past 52 weeks. You can see the results for all 500 companies at the end:
|Change in 52-Week Lows and Highs for S&P 500 Stocks|
|Market Cap (billions)||% Change||$ Change (billions)|
|20 Largest (average)||$314.034||38.43%||$91.052|
|20 Smallest (average)||$4.362||105.04%||$3.100|
|All 505 (average)||$42.447||56.50%|
|All 505 (median)||$19.568||45.81%|
|S&P 500 Index||–||26.08%|
I won’t spend much time on what the data shows since I think it’s fairly self-explanatory.
The largest companies fluctuated less than the smallest and both moved more than the S&P 500 index itself, but remember that’s on average. Several large-cap companies still moved a bit more than their average. Amazon, JP Morgan Chase, and Bank of America saw 79%, 68%, and 113% difference between 52-week lows and highs, respectively. So it’s certainly possible for the biggest companies to have wide price movements in as little as one year.
The S&P 500 index only fluctuated about 26% from low to high. Exactly 50 stocks had a lower 52-week price range than the index, leaving 454 stocks with a wider range. I think most surprising was the average range was about 56% (median at 46%). Just within the S&P, there were a lot of stocks bouncing all over the place.
Some of that price movement was warranted, but not all of it. While it’s nice to see the actual numbers, this idea that stocks move around a lot has been pointed out by many great minds before:
Everyone knows that speculative stock movements are carried too far in both directions, frequently in the general market and at all times in at least some of the individual issues. Furthermore, a common stock may be undervalued because of lack of interest or unjustified popular prejudice. We can go further and assert that in an astonishingly large proportion of the trading in common stocks, those engaged therein don’t appear to know – in polite terms – one part of their anatomy from another. – Benjamin Graham via The Intelligent Investor
Since common stocks, even of investment grade, are subject to recurrent and wide fluctuations in their prices, the intelligent investor should be interested in the possibilities of profiting from these pendulum swings. – Benjamin Graham via The Intelligent Investor
Investor psychology can cause a security to be priced just about anywhere in the short run, regardless of its fundamentals. – Howard Marks via The Most Important Thing
That’s my way of saying people are still crazy. And that’s really an unfair thing to say because the S&P 500 is an average of 500 stocks. There’s huge dispersion going on within that average between stocks that are in favor, that people love emotionally, and stocks that people hate. So it’s really much worse than what I just described. – Joel Greenblatt
If you look at the typical stock on the New York Stock Exchange, its high will be, perhaps, for the last 12 months will be 150 percent of its low so they’re bobbing all over the place. All you have to do is sit there and wait until something is really attractive that you understand. – Warren Buffett
The point is that individual stock prices can move a lot in the span of a year. All that movement creates a lot of opportunities for the disciplined investor.