Day: May 10, 2008

Seven-Plus Years of Trading for the Broad Market Portfolio

Seven-Plus Years of Trading for the Broad Market Portfolio

If you ask me what is more fundamental to me — am I an economist or and an investor? I will tell you that I am an investor. At present for my work I am putting together a pitch book for my company detailing my value investing for potential clients. In the process of doing that, I decided to analyze all of my investments over the past 7+ years, in an effort to find some stories that are representative of my money management methods (both good and bad).

In order to get those stories, I had to download and clean all of my transactions over the past 7+ years, and then calculate the internal rate of return on each stock that I bought over the period. I still haven’t written the stories, and would appreciate advice from readers as to which stocks to use.

As I did my analysis, I learned a few things:

  • Over the 7+ years, I have owned 186 stocks.
  • Slightly more than 75% of my investments have been profitable.
  • My average holding period has been 503 days.
  • I have hit some home runs, and hit into triple plays.
  • My top 11 gains pay for all of my losers.
  • My cumulative profits comprise more than two-thirds of my assets.

Holding Period

Now, on this graph, the days are averages, so zero represents 0-50 days, 100 represents 50-150 days, etc. As you can see, I occasionally trade (though usually not intentionally) , but most of the time I invest.

Internal Rates of Return
What is an internal rate of return [IRR]? It is the constant rate one earns on an investment from start to finish. It is a way of averaging out all of the cash flows, and annualizing the result, so that it can be compared against other investments. Here is a histogram of the internal rates of return on my investments:

But, IRRs can be misleading. A small gain/loss in a short period of time can result in large absolute IRRs. That’s why I decided to create the imperfect concept of the pseudo-cumulative return. Suppose you earned the IRR over the full length of the investment? What would the cumulative return be?

Now, those who have followed me for a while know that my rebalancing discipline forces me to buy or sell after large moves. The pseudo-cumulative return usually overstates my return, because I sold on the way up, and bought on the way down.

The above graph, tough as it is to interpret, gives a reasonable idea of how my investments have worked. Most of my investments last for a few years, some more, some less. I have tended to make money pretty regularly, but I have had some real stinkers. I’ll pick up on that theme in my next post on Monday.

Mea Culpa (ETN Version)

Mea Culpa (ETN Version)

One of the dangers of being a generalist is that you get spread too thin. Another is that you overplay your abilities. I probably did a little of both in my recent post on ETNs (and blogging while tired). The fine folks at Index Universe took umbrage at my post, and for good reason. I wrote a sloppy post without enough research.

Here’s what I intended, even though it came out wrong. I liked the post that came from Index Universe, because it highlighted an issue with ETNs that I had been talking about for two years — you have a significant credit risk there. In the two years since I wrote the piece that I cited in my article, I have read dozens of articles on ETNs, and not one of them mentioned credit risk. So, I was glad that someone had taken up my point. Or, at least, I thought it was my point.

Now, how was I to know that some writers at Index Universe had already written on the issue of credit risk? I read pretty broadly, but I can’t dig for everything. Also, they took it as a poke/jab; that was not my intent. I don’t think that way, and I genuinely like Index Universe, even though I don’t read it daily.

I offered my apologies at their site, and I offer my apologies to readers here. I apologize for my mistakes; I am not like some writers on the web that can never be wrong.

One final note: I have been dealing with credit issues since 1992 in the insurance, mortgage bond, and corporate bond businesses. My experience is very relevant here. You would be amazed at the panoply of products resembling ETNs that got trotted out since the mid-1980s, though I ran into them in the 1990s.

In any case, hail Index Universe, and investors remember, ETNs carry credit risk.

Theme: Overlay by Kaira