What is a realistic return on value investing?

(30-06-2012, 12:21 PM)freedom Wrote:

(30-06-2012, 11:45 AM)CityFarmer Wrote:

(30-06-2012, 09:34 AM)KopiKat Wrote: ...

Another use of such a standardised indicator like XIRR would be (as suggested by 'swakoo') to use it on a subset of my portfolio for comparison purposes. For eg., assuming I compare the XIRR for different Yield Stocks and find that I'm doing much, much better with SPH vs STEng / TELCOs, I could assign more funds (assign a bigger %) to SPH. Yes, thanks to 'swakoo', I think I'm going to find a lot of 'fun' use for XIRR...

This is another good usage of XIRR beside measuring the overall investment performance, i.e. bench-marking across different stocks. Minimum effort required if the transactions are already in a list

but the number of transactions, the timing of transactions matters greatly for such benchmarking.

If we were to use my Case I approach (pg 13, Post #130), then it doesn't matter,

Quote:Case I

A dedicated bank account is used solely for all stocks transactions (or you are able to track all cash inflows and outflows). An example would be what I'm using for my Mother-in-law.

In this case, all you need is to include,

1) New cash inflow (ie. new funds) or outflows (ie. withdrawal)
2) The market value of any unsold stocks
3) Bank balance

There's no need to include all the buy/sell transactions. Also, no need to included Dividends (unless you withdraw it out of bank account to spend). Including Dividends would amount to double counting as any unused portion also appears in the Bank balance.

In such a case, since I'll be extracting the figures as a subset of my bigger spreadsheet, I'll have to input a hypothetical Bank Amount as initial Cash Inflow (I can standardise it with a fixed number eg. $50k, $100k,... and derive the Bank Balance at the end by netting it off against all Buy/Sell/Dividends figures). Using a standardised amount as cash inflow would also be a fairer comparison with another stock (assuming I have similar % of portfolio allocation for both stocks). Even if a different Cash Inflow figure were to be used, it'd still be a good means for comparing.

(30-06-2012, 02:33 PM)KopiKat Wrote:

(30-06-2012, 12:21 PM)freedom Wrote:

(30-06-2012, 11:45 AM)CityFarmer Wrote:

(30-06-2012, 09:34 AM)KopiKat Wrote: ...

Another use of such a standardised indicator like XIRR would be (as suggested by 'swakoo') to use it on a subset of my portfolio for comparison purposes. For eg., assuming I compare the XIRR for different Yield Stocks and find that I'm doing much, much better with SPH vs STEng / TELCOs, I could assign more funds (assign a bigger %) to SPH. Yes, thanks to 'swakoo', I think I'm going to find a lot of 'fun' use for XIRR...

This is another good usage of XIRR beside measuring the overall investment performance, i.e. bench-marking across different stocks. Minimum effort required if the transactions are already in a list

but the number of transactions, the timing of transactions matters greatly for such benchmarking.

If we were to use my Case I approach (pg 13, Post #130), then it doesn't matter,

Quote:Case I

A dedicated bank account is used solely for all stocks transactions (or you are able to track all cash inflows and outflows). An example would be what I'm using for my Mother-in-law.

In this case, all you need is to include,

1) New cash inflow (ie. new funds) or outflows (ie. withdrawal)
2) The market value of any unsold stocks
3) Bank balance

There's no need to include all the buy/sell transactions. Also, no need to included Dividends (unless you withdraw it out of bank account to spend). Including Dividends would amount to double counting as any unused portion also appears in the Bank balance.

In such a case, since I'll be extracting the figures as a subset of my bigger spreadsheet, I'll have to input a hypothetical Bank Amount as initial Cash Inflow (I can standardise it with a fixed number eg. $50k, $100k,... and derive the Bank Balance at the end by netting it off against all Buy/Sell/Dividends figures). Using a standardised amount as cash inflow would also be a fairer comparison with another stock (assuming I have similar % of portfolio allocation for both stocks). Even if a different Cash Inflow figure were to be used, it'd still be a good means for comparing.

I think freedom might have been referring to the different time periods over which individual stocks were bought/sold and thus comparing stock A (during bull) and stock B (during bear) might give a distorted picture.

(30-06-2012, 02:52 PM)smallcaps Wrote: I think freedom might have been referring to the different time periods over which individual stocks were bought/sold and thus comparing stock A (during bull) and stock B (during bear) might give a distorted picture.

Ok, but in my case, I'd be planning to compare over a similar time period eg. within FY12.

After giving it more thoughts, I think the Case 1 approach would give a more conservative (if profitable) XIRR figure as it ignores all the buy/sell transactions and dates. Case 2 approach will likely give very superior XIRR figures for multiple (zillions) profitable trades of short holding periods, I think.

(30-06-2012, 02:33 PM)KopiKat Wrote:

(30-06-2012, 12:21 PM)freedom Wrote:

(30-06-2012, 11:45 AM)CityFarmer Wrote:

(30-06-2012, 09:34 AM)KopiKat Wrote: ...

Another use of such a standardised indicator like XIRR would be (as suggested by 'swakoo') to use it on a subset of my portfolio for comparison purposes. For eg., assuming I compare the XIRR for different Yield Stocks and find that I'm doing much, much better with SPH vs STEng / TELCOs, I could assign more funds (assign a bigger %) to SPH. Yes, thanks to 'swakoo', I think I'm going to find a lot of 'fun' use for XIRR...

This is another good usage of XIRR beside measuring the overall investment performance, i.e. bench-marking across different stocks. Minimum effort required if the transactions are already in a list

but the number of transactions, the timing of transactions matters greatly for such benchmarking.

If we were to use my Case I approach (pg 13, Post #130), then it doesn't matter,

it still matters.

a greater number of transactions normally would result in better performance, but that could be just because there were more in-out opportunities in that specific period. to normalize it and benchmark against other stocks, it would be erroneous.

e.g. for SPH vs ST Engg. If in a particular period for both SPH & ST Engg, SPH is more volatile thus giving more in-out opportunities. but that does not mean SPH is always better choice than ST Engg.

(30-06-2012, 04:26 PM)freedom Wrote:

(30-06-2012, 02:33 PM)KopiKat Wrote:

(30-06-2012, 12:21 PM)freedom Wrote:

(30-06-2012, 11:45 AM)CityFarmer Wrote:

(30-06-2012, 09:34 AM)KopiKat Wrote: ...

Another use of such a standardised indicator like XIRR would be (as suggested by 'swakoo') to use it on a subset of my portfolio for comparison purposes. For eg., assuming I compare the XIRR for different Yield Stocks and find that I'm doing much, much better with SPH vs STEng / TELCOs, I could assign more funds (assign a bigger %) to SPH. Yes, thanks to 'swakoo', I think I'm going to find a lot of 'fun' use for XIRR...

This is another good usage of XIRR beside measuring the overall investment performance, i.e. bench-marking across different stocks. Minimum effort required if the transactions are already in a list

but the number of transactions, the timing of transactions matters greatly for such benchmarking.

If we were to use my Case I approach (pg 13, Post #130), then it doesn't matter,

it still matters.

a greater number of transactions normally would result in better performance, but that could be just because there were more in-out opportunities in that specific period. to normalize it and benchmark against other stocks, it would be erroneous.

e.g. for SPH vs ST Engg. If in a particular period for both SPH & ST Engg, SPH is more volatile thus giving more in-out opportunities. but that does not mean SPH is always better choice than ST Engg.

The bench-marking is not to identify which stock are better than others generally, but to identify stock which perform better under a specific strategy. The bench-marking result might has minimum usefulness to other, but a good reference data when reviewing the strategy.

(30-06-2012, 09:31 PM)CityFarmer Wrote: The bench-marking is not to identify which stock are better than others generally, but to identify stock which perform better under a specific strategy. The bench-marking result might has minimum usefulness to other, but a good reference data when reviewing the strategy.

I share the same thoughts!

(30-06-2012, 03:24 PM)KopiKat Wrote: After giving it more thoughts, I think the Case 1 approach would give a more conservative (if profitable) XIRR figure as it ignores all the buy/sell transactions and dates. Case 2 approach will likely give very superior XIRR figures for multiple (zillions) profitable trades of short holding periods, I think.

Just realised something to be aware of when using XIRR over periods less than 1 year. XIRR annualises by compounding geometrically while our brain tends to annualise by compounding arithmetically. These give different results below a year.

Suppose an investor buys a stock for $1 and makes a gain of 1 cent over 1 period.

If 1 period = 1 month
Annualising by compounding geometrically (XIRR): (1 + 0.01)^12 - 1 = 12.7%
Annualising by compounding arithmetically (brain): 1% x 12 = 12%

1 week
Geometric: (1 + 0.01)^52 - 1 = 68%
Arithmetic: 1% x 52 = 52%

1 day
Geometric: (1 + 0.01)^365 - 1 = 3678%
Arithmetic: 1% x 365 = 365%

Since this is a value investing forum, guess holding periods should be long enough not to be affected by this, esp > 1 month.
But if quick kung fu over a few days, XIRR could make one very happy.

---

(30-06-2012, 04:26 PM)freedom Wrote: a greater number of transactions normally would result in better performance, but that could be just because there were more in-out opportunities in that specific period.

Maybe you've been reading too much of Grandmaster KopiKat's successful kung fu trades.
For others, more transactions could result in poorer performance.

(30-06-2012, 10:35 PM)swakoo Wrote:

(30-06-2012, 03:24 PM)KopiKat Wrote: After giving it more thoughts, I think the Case 1 approach would give a more conservative (if profitable) XIRR figure as it ignores all the buy/sell transactions and dates. Case 2 approach will likely give very superior XIRR figures for multiple (zillions) profitable trades of short holding periods, I think.

Just realised something to be aware of when using XIRR over periods less than 1 year. XIRR annualises by compounding geometrically while our brain tends to annualise by compounding arithmetically. These give different results below a year.

Suppose an investor buys a stock for $1 and makes a gain of 1 cent over 1 period.

If 1 period = 1 month
Annualising by compounding geometrically (XIRR): (1 + 0.01)^12 - 1 = 12.7%
Annualising by compounding arithmetically (brain): 1% x 12 = 12%

1 week
Geometric: (1 + 0.01)^52 - 1 = 68%
Arithmetic: 1% x 52 = 52%

1 day
Geometric: (1 + 0.01)^365 - 1 = 3678%
Arithmetic: 1% x 365 = 365%

Since this is a value investing forum, guess holding periods should be long enough not to be affected by this, esp > 1 month.
But if quick kung fu over a few days, XIRR could make one very happy.

Ok, once again thx for your kind explanation!
In that case, it may be a good idea to remove such short term (<1mth) types of transactions from XIRR computations.

Although the quest for many is to achieve happiness in life, I don't think many will stay happy to find out that achieving a high XIRR alone is actually really going to help fill their bank accout with a lot of real absolute $$!

(30-06-2012, 09:34 AM)KopiKat Wrote: ... I think I'm going to find a lot of 'fun' use for XIRR...

I'll tell you, this one is as much fun as the vlookup/web query tool you painstakingly documented for forumers last time. And that one is much harder to grasp and set up, needing more maneuvers. But both are very efficient tools for a fast moving environment like today's.

(Both learnt thru virtual networking on forums.)

(30-06-2012, 10:35 PM)swakoo Wrote:

(30-06-2012, 03:24 PM)KopiKat Wrote: After giving it more thoughts, I think the Case 1 approach would give a more conservative (if profitable) XIRR figure as it ignores all the buy/sell transactions and dates. Case 2 approach will likely give very superior XIRR figures for multiple (zillions) profitable trades of short holding periods, I think.

Just realised something to be aware of when using XIRR over periods less than 1 year. XIRR annualises by compounding geometrically while our brain tends to annualise by compounding arithmetically. These give different results below a year.

Suppose an investor buys a stock for $1 and makes a gain of 1 cent over 1 period.

If 1 period = 1 month
Annualising by compounding geometrically (XIRR): (1 + 0.01)^12 - 1 = 12.7%
Annualising by compounding arithmetically (brain): 1% x 12 = 12%

1 week
Geometric: (1 + 0.01)^52 - 1 = 68%
Arithmetic: 1% x 52 = 52%

1 day
Geometric: (1 + 0.01)^365 - 1 = 3678%
Arithmetic: 1% x 365 = 365%

Since this is a value investing forum, guess holding periods should be long enough not to be affected by this, esp > 1 month.
But if quick kung fu over a few days, XIRR could make one very happy.

---

(30-06-2012, 04:26 PM)freedom Wrote: a greater number of transactions normally would result in better performance, but that could be just because there were more in-out opportunities in that specific period.

Maybe you've been reading too much of Grandmaster KopiKat's successful kung fu trades.
For others, more transactions could result in poorer performance.

Do not think you should omit any data as it is real profit/Lost. the super high value is due to solid performance within a short period. If you can consistently do this for rest of year, it is this super value. The reality is, we all can't. The problem can be easily overcome.

If is performance within a year (YTD), what you should do is to use end date 31 dec in your balance unsold stocks.

If is multi-years as continuous of your investment since day 1, is not a problem either because over the course of years all your trade recorded will spreaded out, sudden spike due to profit within a short period for a stock is kind of "amortized". If you still see super high value, that's mean your performance is really solid which is unlikely and likely you have computed wrongly.

You can try both and see for yourself.