What is a realistic return on value investing?

[KopiKat]

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.

Just curious,

In a multi-stocks portfolio, what if I have multiple transactions of,

Buy B then Sell A (1 day later) where A Value > B Value
Buy C then Sell B (1 day later) where B Value > C Value
.
Buy Z then Sell Y (1 day later) where Y Value > Z Value

gives a super high XIRR value (since XIRR doesn't know that you are transacting in different stocks)? Or somehow, the initial Buy A Value and final Z Value will help mitigate the XIRR figure?

Each transaction's XIRR value is high in 1 day, but will be normalized after annualized to 365 days.

It does not matter the number of transactions, but the "annualized return" of each transaction matter.

The best is to try with an example via excel.

Exactly. I think KopiKat has cited a very good example of what corydorus was trying to say and my clumsy replies to her.

Ok, I tried it out and played around the values, duration between cash in/out flows ie. buy/sell and with the period (by stretching the end date). I think I may have finally grasp what all of you had been trying to explain.

Very sorry and thank you for being so patient, the problem is with me. Some of the technical / financial terms which seems like A-B-C to all of you sounds more like Greek to me. Luckily, I was able to use the 'Translate' button in Google Chrome to help with the translation (just kidding, was using the 'Search' button).

[corydorus]

There are 2 key measures - Annual performance and Lifetime Investment performance that i use. Both have different purposes. I use both to measure, change my strategy, validate and control my investments. Ofcourse ego do play a part.

Annual Performance - Is good for comparison under the same condition of how do i perform against my peers (You) on annual basis.
To do this, we need to have apple-apple setting. As indicate earlier, 365 days as an annual basis. But my 365 days and yours may not start/end the same and this will result uneven comparison. Therefore i advocate 31 dec 'xx for each year to everyone for ending.

Lifetime Performance - Is done as a "Live" compute on what is my performance today. Therefore today() is used for balances not 31 dec. This measure is good to say what's my return like long term compared to peers, FD, bond, preference share ... etc
If your return is say below 2% annualized over 5 years. Maybe you should quit investment in stock altogether for example and have fun while parking your money in Fixed Deposit AUD. Alternatively you may like to check what is fundamentally wrong with your investment that you must admit and improve.

Measure is like a steer and a relative tool. Without it you are directionless. And never ever omit any real data as you will need it later.


Cory

[KopiKat]

So, I thought I finally understood how to use XIRR and went to try it out on my entire portfolio to check my mid-year performance. What I did,


1 Jan 12 : + (Mkt Value of Stocks on 31 Dec11)

Dates : + (Buy Transactions)
.
.
Dates : - (Sell Transactions)
.
.
Dates : - (Dividends)
.
.

30 Jun 12 : - (Mkt Value of Stocks on 30 Jun 12)


Dates above means each individual date and the corresponding value of transaction.
I also did an XIRR without the Dividends for comparison purposes.

Is the above OK?

[corydorus]

Investment cost at date of purchase = -VE
Sell Amount at date of sale = +VE
Dividend at date of EX-Div= +VE
Balance Shares market value today but entered as 31 dec 2012 = +VE (For Annualized Yearly Measure)

[KopiKat]

Investment cost at date of purchase = -VE
Sell Amount at date of sale = +VE
Dividend at date of EX-Div= +VE
Balance Shares market value today but entered as 31 dec 2012 = +VE (For Annualized Yearly Measure)

The polarity (+/-) is not so important as long as we get them correctly for the same flows ie. inflow all same polarity and outflow the same reverse polarity. I reversed all mine to be same as yours and got the same XIRR (also no change in XIRR polarity).

I also used, 1 Jan 12 : + (Mkt Value of Stocks on 31 Dec11)

instead of 'Investment cost at date of purchase' as I wanted to benchmark against STI for the year 2012.

Ok, good idea to use 31 Dec 12 since I wanted to benchmark against STI, which won't be an annualised figure.

Thx!

[corydorus]

You are to correct to use "I also used, 1 Jan 12 : + (Mkt Value of Stocks on 31 Dec11)" to value a new year value.

I was referring to new purchase within the same year. Thanks for the correction.

[CityFarmer]

Investment cost at date of purchase = -VE
Sell Amount at date of sale = +VE
Dividend at date of EX-Div= +VE
Balance Shares market value today but entered as 31 dec 2012 = +VE (For Annualized Yearly Measure)

The polarity (+/-) is not so important as long as we get them correctly for the same flows ie. inflow all same polarity and outflow the same reverse polarity. I reversed all mine to be same as yours and got the same XIRR (also no change in XIRR polarity).

I also used, 1 Jan 12 : + (Mkt Value of Stocks on 31 Dec11)

instead of 'Investment cost at date of purchase' as I wanted to benchmark against STI for the year 2012.

Ok, good idea to use 31 Dec 12 since I wanted to benchmark against STI, which won't be an annualised figure.

Thx!

I am using exactly as stated by corydorus, +ve for dividend and selling, -ve for buying. I start the year base on market value of 1st Jan, and end the year with 31st Dec market value.

Since STI is not annualized, should we use 30 Jun 2012 market value as last entry if we want to benchmark with STI for half year performance? instead of 31 Dec 2012?

[KopiKat]

Since STI is not annualized, should we use 30 Jun 2012 market value as last entry if we want to benchmark with STI for half year performance? instead of 31 Dec 2012?

XIRR gives an annualised figure. If we were to use 30 Jun 12 as the End Date, we'd get a figure that's more than twice.

Since I wanted to benchmark against STI to date (+8.77%) and this is not an annualised figure, I used 31 Dec 12 as my End Date even tho' we don't have that Market Value yet ie. I used 30 Jun 12 Mkt Value (but used 31 Dec 12 as the date).

[CityFarmer]

Since STI is not annualized, should we use 30 Jun 2012 market value as last entry if we want to benchmark with STI for half year performance? instead of 31 Dec 2012?

XIRR gives an annualised figure. If we were to use 30 Jun 12 as the End Date, we'd get a figure that's more than twice.

Since I wanted to benchmark against STI to date (+8.77%) and this is not an annualised figure, I used 31 Dec 12 as my End Date even tho' we don't have that Market Value yet ie. I used 30 Jun 12 Mkt Value (but used 31 Dec 12 as the date).

OK. I had confused myself instead. Side-effect of crunching too much number

[smallcaps]

So, I thought I finally understood how to use XIRR and went to try it out on my entire portfolio to check my mid-year performance. What I did,


1 Jan 12 : + (Mkt Value of Stocks on 31 Dec11)

Dates : + (Buy Transactions)
.
.
Dates : - (Sell Transactions)
.
.
Dates : - (Dividends)
.
.

30 Jun 12 : - (Mkt Value of Stocks on 30 Jun 12)


Dates above means each individual date and the corresponding value of transaction.
I also did an XIRR without the Dividends for comparison purposes.

Is the above OK?

Actually, I think if we do XIRR in this way, it can't be compared to say, the STI over the same period, since it might cause big differences between the actual CAGR and the XIRR computed.

Would like to suggest that in your case where it is too tedious to compute actual capital injections, that a more conservative method be used as it would be much easier to do in excel and since it is conservative, as long as the rate computed satisfy your target rate, then it should be fine:

conservative rate = ((total value at end of period) / (total injected capital))^(1/number of years)

It is easier to compute since total injected capital can be assumed to be:

total injected capital = total value at end of period - all dividends - all realised profit (just include all realised buys/sells)

It is conservative since it assumes that all capital injections happened at the start of the period.