Use access key #2 to skip to page content.

Yeah, but how good is he with *real* money?

Recs

3

December 05, 2006 – Comments (13)

I absolutely *love* CAPS - for a whole lot of reasons. One thing CAPS isn't though, by design, is a portfolio simulation game. There is no buying more on dips, allocating more money to some picks than to others, etc.. This might leave some Fools wondering, "Hey, that player's CAPS score is great, but what does that tell me about how good that player is when it comes to investing in the real world?"

I know I've wondered just how well some other CAPS players do when managing their real-life portfolios, so I'm guessing that some of you might be wondering how well I've done when managing my own real-life portfolio.

Unfortunately, I can't tell you that.

It's not that I *won't* tell you... I *can't* tell you. Truth is, I don't know exactly.

I certainly monitor my portfolio, I know that it's grown over time, I've made a few really nice picks that have made some pretty nice gains (my best individual stock pick is a triple - no 10 baggers yet, but I'm working on it!) - and I've made some mistakes too that cost me a pretty penny (or I *wish* they only cost me a penny!).

But I've never really sat down and figured out what my portfolio's overall rate of return has been, so while I believe I've beaten the overall market, I've never done the math that proves it - and if I have been beating the market, I don't know by how much. Who knows? Maybe I've been just treading water or even losing to the market and would be better off in Spyders - I doubt it, but since I've never done the math, I don't know for sure.

Why haven't I calculated my portfolio's return over time to see how well I'm doing? Seems like a good and logical thing to do, right? I'm sure that it is, and maybe someday soon I'll sit down and do it - and if/when I do, I'll let you know in a blog post how the numbers come out - good or bad.

When it comes to tracking my portfolio's overall success, though, I guess I'm of the Henry Ford school of portfolio management. Henry Ford is widely attributed as having said, "Watch the pennies, the dollars will take care of themselves."

This pretty well captures my personal view regarding tracking my portfolio... "Watch the individual companies and stocks - the overall portfolio return will take care of itself." If I buy great companies at good prices, monitor them, buy more of certain holdings when Mr. Market decides to put what I think are great companies on sale, my overall portfolio return will take care of itself. After all, my overall portfolio return is nothing more than the sum total of all of the investing decisions I've made to date - if I do well with the little things, the individual stocks, companies, and decisions, the big things, in this case my portfolio's overall return, will follow.

Watch the pennies, the dollars will take care of themselves. This approach might not work for everyone, but I think it's served this Fool pretty well so far.

13 Comments – Post Your Own

#1) On December 05, 2006 at 12:07 PM, TMFEldrehad (99.99) wrote:

Well, I actually sat down and figured it out - with the help of Excel it didn't take long.

Since I promised to publish the numbers, good or bad, here they are.

My self-managed portfolio's compound annual growth rate (this excludes some index funds I'm invested in) has been, since inception, (reflecting the timing of all of my contributions and including transactions costs)... drumroll please...

10.1%

Had I invested in Spyders instead (also taking into account the timing of all contributions) my portfolio's annual growth rate since inception would have been... drumroll please...

3.0%

Please note, I did not take dividends into account with regard to the Spyders, and they are included in my portfolio's annual growth rate - so I've been outperforming the market to a slightly lesser extent than what the above numbers would indicate.

The current dividend yield on Spyders is about 1.7% - so for talking purposes let's say it's 2%. Taking this into account would suggest that I've outperformed the market by about 5% or so since inception (in the year 2000). It may work out to something a little different than that as the 2% figure isn't perfect, and it also doesn't reflect the timing element if we assume (as I think we should) that those Spyder dividends were reinvested, but it shouln't be *too* far off.

Maybe in another 5 years I'll check back to see if I can keep this up, but until then I'll continue to "watch the pennies, and let the dollars take care of themselves". Seems to have been working out for me fairly well so far. :-)

Report this comment
#2) On December 05, 2006 at 4:46 PM, TMFEldrehad (99.99) wrote:

Hmmm... I just realized something else.

When I first began self-managing my portfolio, I began with the "Index plus a few" strategy whereby the bulk of my portfolio was invested in Spyders - combined with just a few individual stocks. As I learned more as an investor, I began slowly moving the money out of the index ETF and more and more into individual stocks.

With that in mind, if I were to compare how well I did in individual stocks vs. the market my outperformance should be somewhat better than my original calculation would imply - since my overall performance is being 'weighed down' so to speak by a sizeable part of the portfolio pretty much matching the S&P return over that timeframe.

Maybe I'll get around to that exercise sometime... but then again, maybe not. My lesson learned here, though, is that my principle of minding the individual holdings while letting overall performance take care of itself seems, at least for me, to have been working.

Report this comment
#3) On December 05, 2006 at 4:56 PM, HGtrader (< 20) wrote:

Not bad, I also use the index plus a few strategy. I'm up 13% this year. I wonder how much would it be if I remove the S&P500 index I have.

Report this comment
#4) On December 05, 2006 at 5:34 PM, TrendIsMyFriend (< 20) wrote:

TMFEldrehad, I think that there is major flaw in TMF CAPS.

The main purpose is to outperform the market by gain%

When you make underperform pick you get an advantage in CAPS.

Example. You make underperfom pick and your stock goes down 10% while market goes up 20%.

Your final result in CAPS = outperform of the market by 30%.

When actually with real portfolio you would've made 10% when the market would've made 20% so therefore you underperformed the market by 10%.

+30% vs -10% is a huge difference huh?

You would be surprised what your real rating would be after this adjustment ;)

P.S. English is my 4th language sorry if I made some mistakes.

Report this comment
#5) On December 05, 2006 at 5:44 PM, TMFEldrehad (99.99) wrote:

When comparing an underperform call to a true 'short' position, you are correct. An underperform call isn't a short position, however - and there is, indeed, a way in the real market to get all 30% you speak of when making an underperform call.

The way to do that is short sell the stock in question, and invest the proceeds from the short sale in an S&P index. This way one will, indeed, gain both the 10% 'down' and the 20% 'up'. This doesn't include margin interest, but there is a way to effectively do the same thing in the real market.

CAPS isn't a portfolio simulation game, and has never pretended to be. With that in mind, comparisons to real-world portfolio performance a highly problematic, for a number of reasons - but again, there is a way to mimic one's CAPS score for a pick in the real world.

Report this comment
#6) On December 05, 2006 at 5:58 PM, TMFEldrehad (99.99) wrote:

Okay... since I last posted on my real-world portfolio performance, the 'bug' bit me, and I wanted to figure out what my self-directed portfolio performance was once one adjusted for the investments I made in Spyders along the way - both to satisfy my curiosity, and also just because I like playing with spreadsheets (okay, we all know I'm a nerd already, so why even bother with a facade?).

This way, I get a picture of how well my individual stocks did on their own over time.

Well, after pulling out all of my Spyder investments (and Spyder dividends), my portfolio's compounded annual rate of return is... 14.8%. A fair bit better than the 10.1% figure for my overall portfolio over the same period of time - which is what I expected.

What I don't know is how this 14.8% number compares to the index over the same period, because the timing of all of the individual buy and sell transactions is quite different than that presented in my overall portfolio analysis (in which I only had to worry about contributions and total portfolio value).

That would be one big, ugly, calculation - even without trying to figure out dividend reinvestment - because I'd have to look up the historical S&P prices at every transaction date... what a mess!

Given that I've never really even bothered to figure out my overall portfolio performance until writing this blog, I think that's just way too much trouble, so I'm not going to bother with it.

The important takeaway for me, again, is that I seem to have been rather comfortably beating the S&P with my self-directed investments - and doing so by paying attention not to my overall performance, but by paying attention to each individual holding and transaction....

Watch the pennies, the dollars will take care of themselves. In my case, at least, it again seems to be working so I'll stick with it.

Report this comment
#7) On December 06, 2006 at 12:05 AM, TrendIsMyFriend (< 20) wrote:

Reply to #5):

I am not sure how do you get 30% by shorting stock and buying index.

The way I see it.

Both investors have 100k.

1st buys S&P for 100k and gains 20% - profit 20k

2nd shorts stock for 50k and buys S&P for 50k

stock gains 10% S&P gains 20% - profit 5k+10k=15k

- margin interest%

There are many ways to outperform the market.

My favorites are:

1.Covered call writing.

2. 130/30 portfolio (shhh don't tell anyone I told you this. "They" dont want personal investors to know all Wall Street tricks ;)

Good luck

Report this comment
#8) On December 06, 2006 at 4:52 PM, TMFEldrehad (99.99) wrote:

This is getting a bit off the topic of the thread, but there's an error in your logic.

"1st buys S&P for 100k and gains 20% - profit 20k"

That's not what a CAPS outperform call is. More importantly, what if over this period of time the S&P went up by more than 20%? You include the difference between the benchmark and the stock in question when you make your underperform example, but not here in your outperform example. I think that's a mistake.

In a nutshell, CAPS is tracking whether or not your call was correct, and by how much, relative to the market. It was never intended to be a portfolio simulation game. You are right that there's no such thing as an 'underperform' call per se (though it can be mimiced) - but what you miss is that there's no such thing as an 'outperform' call either. One is either long or short, not outperform or underperform. The same issue exists with both outperform calls and underperform calls - why people only take issue with it on the underperfome side is beyond me.

That said, if one insists on finding a mechanism in the real market that duplicates the score seen in CAPS, they do exist.

An underperform call is the same thing as shorting the company in question, and investing the proceeds from the short sale in the S&P.

An outperform call is the same thing as shorting the S&P, and investing the proceeds from the short sale in the individual stock in question. (Note this is quite different from the way you presented it)

Margin interest and transactions costs ignored in both examples above.

Report this comment
#9) On December 07, 2006 at 5:01 PM, glenstock (82.87) wrote:

I realize that CAPS is not designed to be a portfolio-evaluator, but, rather, a stock-picking game. However, I am using CAPS (mostly for fun, I admit) to help me evaluate my portfolio-creation skills (if such a thing exists). I have entered into the CAPS system only the stocks in which I have invested real money, either mine or my mother-in-laws, whose portfolio I am managing.

If, for example, my CAPS score is going down while my percentage money gain is going up (in relation to the market), the allocation of my money among stocks is strong while my stock-picking is not doing as well. If the opposite is the case then, well...the opposite is the case.

In any case, I am thoroughly enjoying the CAPS system. Thank you Fool.

Report this comment
#10) On December 07, 2006 at 5:39 PM, glenstock (82.87) wrote:

I realize that CAPS is not designed to be a portfolio-evaluator, but, rather, a stock-picking game. However, I am using CAPS (mostly for fun, I admit) to help me evaluate my portfolio-creation skills (if such a thing exists). I have entered into the CAPS system only the stocks in which I have invested real money, either mine or my mother-in-laws, whose portfolio I am managing.

If, for example, my CAPS score is going down while my percentage money gain is going up (in relation to the market), the allocation of my money among stocks is strong while my stock-picking is not doing as well. If the opposite is the case then, well...the opposite is the case.

In any case, I am thoroughly enjoying the CAPS system. Thank you Fool.

Report this comment
#11) On December 07, 2006 at 6:40 PM, TrendIsMyFriend (< 20) wrote:

Response to #8

When you have time read my Blog "Top 50 in 18 days? ;)" regarding rating and CAPS in general.

Report this comment
#12) On December 08, 2006 at 11:02 PM, mikeinmadrid (93.42) wrote:

You return doesn't mean anything unless you say from when. Forgive me if I missed it in the thread. It's absolutely wonderful if its from March 2000, its terrible if its from February 2001!

Report this comment
#13) On December 09, 2006 at 5:50 PM, TMFEldrehad (99.99) wrote:

The majority of my portfolio was contributed in August of 2000 - but earlier in the thread I stated what the S&P returned over the same time - that'd be the better indicator as to how well you think I'm doing relative to the market.

Report this comment

Featured Broker Partners


Advertisement