Case Study: Making Investment Decision
Making an investment-related decision involve gathering data, analysis, and prediction. As a rule, at any moment, two groups of factors exert influence on the decisions – positive and negative. To minimize the investment risk, all factors should be properly evaluated. This article shows an example of a real time experiment of making investment decisions. The experiment started in February 2009. The initial amount of fund for investing was around USD 2000. Below are some inputs for making the first buying decision at that time:
- The US and global economies were in a bad shape. Although the stock market showed some weak signs of recovering, most investors considered the market as bearish.
- In addition, there was some risk for the market to decline in the short term mostly due to expected disappointing financial reports for the fourth quarter of 2008.
- On the other hand, normally, month February is a annual cyclical minimum for energy sector stocks. It was confirmed by the chart of the indexes that represents the energy sector (XLE and XEG.TO). The result was calculated by SMAP-2 using the recent 12-year period.
- Statistical research may not be accurate if something new suddenly appears.
- Another positive factor was the fact that the equity markets are leading indicators of economy. As a rule, the stock market starts recovering in around six months in advance before the economy.
- Calculated composite rating (by InvAn-4) and comparative analysis of sectors showed a favorable position for energy sector stocks. OII was one of the stocks from energy sector with high composite rating. OII has all good three components of composite rating – fundamental, technical, and timing ratings.
- On February 6th, the five-day forecast by NNSTP-1 showed some uptrend so that the entry point (buying) was chosen correctly. The stock OII was purchased.
After purchase the overall stock market moved slightly up and then went down more erasing previous gain. The lesson – a market correction (decline) can be used as an opportunity to maximize return. However, eventually the stock moved up much more with solid ROI – more than 25% in April.