If I look at where my portfolio is since Feb 11 (the Bottom, when all those TA guys we’d never seen before appeared on our board saying their charts were screaming sell, sell, sell!), I’m up 28.3% since then! Now +28.3% is a lot to be up in 5 months!
But if I look at where my portfolio is since Jan 1, it’s only up 3.3%, which is fairly mediocre.
The question is: Was I just a mediocre investor on Jan 1st, and then became incredibly smart on Feb 11th? Or do short-term results depend on where you start from? (I think the answer is obvious: I became incredibly smart on Feb 11, and have remained so! ? )
One of the weaknesses of charts is that they are incapable of predicting reversals. Most forecasting is just extrapolating the past, the shorter the time frame you use the less accurate it will be in the long run. Nothing and no one can predict the future. Charts can be very useful but you have to learn to use them, like any other tool. A simplistic approach to charts is dangerous.
Using beginning and end numbers to calculate your returns is correct for accounting but not very useful when studying charts because “It all depends on where you start from.” For statistical purposes a best fit line like Mike Klein uses is better. As you can see from the chart, the calculated average CAGR is very different from the CAGR calculated based on starting and ending numbers.
There are people who say that what happened 30 or 50 years ago does not matter. This is a simplistic approach. One can deduce from long term charts how relevant the past is. The 30 year AAPL chart shows 15 years of stagnation followed by 15 years of fast growth, something changed! But look at the MMM chart, steady as a rock except for the 2008 financial collapse.
I have been using the fast growth approach for the past two years. I’ve been a lot more successful with stocks that have a long term price history that with stocks with less price data. But, of course, these charts can’t tell you what will happen tomorrow, no one can. But they can suggest buying at low CAGR because, more than likely, they will revert to the mean (average GACR).
Rolling 10-year return including dividends, minus inflation, taxes and all ‘business costs’ e.g. software, subscriptions) compared with a personal benchmark composed of an average of a few chosen funds (ETFs and mutual). As with fund managers, I do not think any shorter period can be indicative of ability.
I do not include trading costs because I have never understood what people mean when they say ‘trading costs can seriously eat into your returns’. Certainly that used to be the case but now any size of investment costs commission in single figures, about a quarter the cost of a well-made dry martini in the old Peninsula, a packet of extra-salted pork scratchings and a couple of cigarettes and I don’t count those either.
I KISS (keep it simple stupid). I calculate my returns based on cash flow – trades after commissions, fees and withholding taxes. I should note that as a foreign investor I don’t pay US capital gains taxes, only a withholding tax on interest and dividends which makes my accounting a lot simpler. “Inflation” is a number fudged for political reasons and has little to do with reality, besides, if my neighbor and I buy different kinds of things we have different inflation rates. In other words, I measure what is measurable (cash flow) and ignore the rest.
I measure myself against the S&P 500 to see how well or badly my strategy is working out but what counts is whether you have the returns to meet your expenses. The larger your portfolio the less efficient and less risky it can be and still do its job.
I think measuring cash flow can make sense, just like it does when evaluating a stock. If I can get cash out of my account, and my account doesn’t steadily shrink from that, then the more cash I can take out “safely”, the better off I am. That would mean either taking some capital gains, shorting options, or getting dividends/interest.
It reduces the “power of compounding”, but if you need the money, then you have to get it from somewhere.
If all your money is locked up because of your current investment positions, and you’re retired, then how do you pay the rent?
If all your money is locked up because of your current investment positions, and you’re retired, then how do you pay the rent?
It depends on your sources of income. Most retirees get social security and possibly other payments. The difference between that and your monthly expenses has to come out of the portfolio. The way Saul moves in and out of stocks should provide ample opportunity to take what is needed. Someone with a fewer or no trades can get the cash from dividends and distributions. I’m getting more than enough from selling covered calls. I’m averaging a bit over 5% from the option trading. Having to sell shares to meet expenses should be the last resort. In the end one does what one must do.
