Buy Recommendations: able and not able to transact

Working with recommendations: Afterpay Touch Group

Afterpay isn’t a stock for the faint hearted but it’s great as a case study to illustrate how Pythagoras buy recommendations work. 

Each buy recommendation comes with an upper price limit which we measure against at the end of the day, using the close price.  Where the close price is less than the price limit we record the close price as the transaction price of the buy.  We believe the close price as a fair measuring stick that can be independently verified by anyone. 

Most recommendations can be acted upon by customers at less than the upper end of the recommendation price – but occasionally it’s not possible.  Afterpay is one of those stocks and here is an example of a recommendation that can be acted upon and one that can’t.

Recommendation able to be acted on

Looking at the first star on 6/8/2018 we have a buy recommendation – at 12pm.  The details are APT: Afterpay Touch Group Ltd – Buy between $21.5 and $22.57 or lower”.  Prices on 6/8/19: open $21.50; high $22.92; low $21.20; close $22.48.

The meaning of this recommendation: 

The first price is the opening price of the day – for your reference.  If you can buy the recommendation cheaper than this opening price then go for it.

More important is the upper limit – buy at less than $22.57.  It is the top of the range you ought to pay. We set a tolerance which reflects confidence in the recommendation.

During the afternoon you may or may not get the opportunity to buy at less than this price. Pythagoras judges the ability to buy based on the close price of the day.  Looking at the close price of $22.48 compared to the top end of the recommendation of $22.57 we see that the recommendation was able to be bought.

The graph covers August 2019.  You can see the left hand side there is a star (buy) – and then in the middle a square – the sell.  Clients pocket an 8%+ gain. 

Pythagoras uses new prices each day to make its predictions.  After the sale 19/8/2019, with 2 more days information, the system made a new prediction and recommendation on 21/8/19 – a buy.  It was able to be transacted at $24.06 and sold on the 29/8 at $29.62 close price.  Client’s pocket a 23% profit in 8 days.

Recommendation un-able to be acted on

On the 26/8/2019 there was a recommendation at $23.30 – right at the bottom of the ‘V’.  The recommendation was with a very tight range – the top end was $23.53.  “APT: Afterpay Touch Group Ltd – Buy between $23.3 and $23.533 or lower” .  Prices on 26/8/19: open $23.30; high $24.23; low $23.26; close $24.00.

This was a great buy recommendation but we were overrun by the price galloping away.  The price closed at $24.00 so Pythagoras doesn’t claim any return for that buy.  This is an example of where an upper limit appears to work against us but this is the exception to the rule.  There may have even been the opportunity to get invested again, for those who acted quickly, giving an even greater return.  Regardless the buy on 21/8/2019 was successful and returned 23% in 8 days.