Investment Return Question

[Spock]

As Marley said-this is a slowly dying Bored-so it doesn't hurt to throw this out there. Plus you can't do this on FB with Real-Life Friends and Family present.

1) I am basically a contrarian investor. In 8th grade, a friend of mine in 9th grade(in their stock picking unit) bought MGM right after the big fire. It was extremely low at the time because of the fire and rose quickly over the time of the study. That lesson has stuck with me.

2) I handle a portion of my Dad's IRA as individual stocks with full discretion and I am very happy with where I have taken it (as is he).

3) Since I got access to Sirius satellite radio, I listen to a fair amount of financial shows (CNBC, Fox Business, and Bloomberg Business). I don't like to listen to music stations (much) and I have gotten bored with political talk. Yesterday, on CNBC they said that if someone purchased Microsoft before the tech crash in 2000 or 2001 they are not back to even yet. (excluding dividends of course.)

4) In about 2000, for Dad's IRA, I bought 100 shares of Philip Morris (PM)for under $15/share. Call it $15 ($1500) for simplicity. That was about the time of the tobacco lawsuits and so forth and the stock was near its 52 week lows and had about a 5% dividend.

5) Within a year or 2, PM had doubled to over $30 a share. I sold 50 (half) of the PM shares and pocketed $1500-the amount of the original investment-so from that point on-all PM stuff, I was playing with house money.

6) I think the way to allocate things at this point to figure return is that the original investment is now $750 and profit of $750 has been taken out. All dividends were reinvested into buying more shares of PM and the subsequent companies.

7) Over the next 15 years, PM spun off 3 more companies. Altria, Kraft and Mondelez. I kept all shares in these companies as offshoots of the original $750 investment.
The current amounts in each of these companies are
PM=$5,350
Altria=$2,670
Mondelez= $1415
Kraft= $775.
Rough Total =$10,210

Add back in the $750 removed from the table early equals roughly $10,960

$10,960 divided by $750 equals about 1,461%

Divide 1461% by 15 years =97.4% average return over the roughly 15 year timespan.

The Microsoft stat listed above started me thinking about this more closely.

Am I missing something?-ie should the math be done differently? Is it really possible that I (Dad) has averaged almost 100% return per year over the last 15 years on his PM stock?

[Bob78164]

As Marley said-this is a slowly dying Bored-so it doesn't hurt to throw this out there. Plus you can't do this on FB with Real-Life Friends and Family present.

1) I am basically a contrarian investor. In 8th grade, a friend of mine in 9th grade(in their stock picking unit) bought MGM right after the big fire. It was extremely low at the time because of the fire and rose quickly over the time of the study. That lesson has stuck with me.

2) I handle a portion of my Dad's IRA as individual stocks with full discretion and I am very happy with where I have taken it (as is he).

3) Since I got access to Sirius satellite radio, I listen to a fair amount of financial shows (CNBC, Fox Business, and Bloomberg Business). I don't like to listen to music stations (much) and I have gotten bored with political talk. Yesterday, on CNBC they said that if someone purchased Microsoft before the tech crash in 2000 or 2001 they are not back to even yet. (excluding dividends of course.)

4) In about 2000, for Dad's IRA, I bought 100 shares of Philip Morris (PM)for under $15/share. Call it $15 ($1500) for simplicity. That was about the time of the tobacco lawsuits and so forth and the stock was near its 52 week lows and had about a 5% dividend.

5) Within a year or 2, PM had doubled to over $30 a share. I sold 50 (half) of the PM shares and pocketed $1500-the amount of the original investment-so from that point on-all PM stuff, I was playing with house money.

6) I think the way to allocate things at this point to figure return is that the original investment is now $750 and profit of $750 has been taken out. All dividends were reinvested into buying more shares of PM and the subsequent companies.

7) Over the next 15 years, PM spun off 3 more companies. Altria, Kraft and Mondelez. I kept all shares in these companies as offshoots of the original $750 investment.
The current amounts in each of these companies are
PM=$5,350
Altria=$2,670
Mondelez= $1415
Kraft= $775.
Rough Total =$10,210

Add back in the $750 removed from the table early equals roughly $10,960

$10,960 divided by $750 equals about 1,461%

Divide 1461% by 15 years =97.4% average return over the roughly 15 year timespan.

The Microsoft stat listed above started me thinking about this more closely.

Am I missing something?-ie should the math be done differently? Is it really possible that I (Dad) has averaged almost 100% return per year over the last 15 years on his PM stock?

The math should definitely be done differently. You want to take the 15th root of 14.61. You'll find that your annualized return is approximately 19.6%. --Bob

[plasticene]

I'd also exclude the $750 profit from the calculation. You got that from the other $750 you invested, not from the $750 investment that you're calculating the return on here. If we assume the stock was purchased on 1/1/2000, then 14.29 years have now passed, and the annualized return is (10210/750)^(1/14.29)=20.0%. Not too shabby!

[smilergrogan]

100% return per year means you double your money each year. If this were true for 15 straight years you would have 2^15 = 33000 times as much money as you started with, which would be around $25 million starting with $750. The way you are calculating amounts to finding the average % of $750 you earned per year over the 15 years, which for 100% gives you about 15 x $750 = about $11000.

The annual return rate r can be calculated as continuously compounded interest by the formula P(t) = P x e^(rt), where P is the initial investment ($750) and P(t) is the balance ($10900) after t years. This rearranges to r = (natural log (P(t)/P))/t = about 0.18 (18%) for t = 15 years. Still not too bad.

[Vandal]

Three different formulas. Three different answers.

Gotta love the Bored!

[Catfish]

Three different formulas. Three different answers.

Gotta love the Bored!

I was amazed at how close the answers were with the three different formulas!

[Bob Juch]

Microsoft closed at $40.01 today. It's back to where it was on Feb. 5, 1999. That doesn't account for dividends nor inflation.

Since I paid $0.40 for my shares I'm not complaining.

[littlebeast13]

Three different formulas. Three different answers.

Gotta love the Bored!

I was amazed at how close the answers were with the three different formulas!

If only I'd have known math was a liberal art, I'd have probably done better at it in school....

lb13

[Spock]

Thanks guys-after I posted it and was thinking about it more-I realized the 100% error, but didn't know how to do the right math.

That makes sense.

I think the 4 companies out of a small investment is kind of cool so I am just letting things ride, even though I am getting very bored with Kraft.

[Bob78164]

Thanks guys-after I posted it and was thinking about it more-I realized the 100% error, but didn't know how to do the right math.

That makes sense.

I think the 4 companies out of a small investment is kind of cool so I am just letting things ride, even though I am getting very bored with Kraft.

By my lights, boring is a good thing in an investment. --Bob

[Spock]

Thanks guys-after I posted it and was thinking about it more-I realized the 100% error, but didn't know how to do the right math.

That makes sense.

I think the 4 companies out of a small investment is kind of cool so I am just letting things ride, even though I am getting very bored with Kraft.

By my lights, boring is a good thing in an investment. --Bob

Hey, we agree on something (mostly). I have paid little attention to Kraft, because it is essentially on auto-pilot, but it isn't so boring when I looked at now. 3.69% dividend plus 25% appreciation since mid 2012.

It is neat to be sitting on an unexpected double in a boring stock/company like Pfizer, which was purchased 4 or 5 years ago, mainly for the dividend. However, I have thought many times about pulling half the money out (like PM)-but I have come down on the side of leaving it all in Pfizer as I don't know where else I would put it and that is the only exposure he has to the drug/health industry in the actively managed IRA.

Now the non-boring portion of the portfolio is a huge overweight in exposure to the Bakken and Eagle Ford. But that is a decision made almost daily to remain invested in that as a long-term business and see where it takes us.

[ShamelessWeasel]

Three different formulas. Three different answers.

Gotta love the Bored!

Lets make it 4. My job is to build performance reporting software for institutional reporting and we work with many of the large investment houses you know (Lehman was a big client before they blew up to give you an idea of who we work with)

Here is how we would calculate the return

I will assume that you Started on 1/1/2000 with an initial investment of $1500. At some point in there you withdrew $1500 leaving you with an end balance of $1500 for this first period

The return would be the profit divided by the average caiptal.

Profit is End Value - Begin Value - Flow for period 1 this is (1500-1500- (-1500)) = 1500
Average Capital is what money you had on average invested during the period and is defiend as Begin Value + Weighted Flow. Weighted flow takes into account when the flow happened. Since the $1500 was withdrawn on the last day of this period the weighted flow would be 0 and the average capital would be 1500 + 0 = 1500

Your return for Period 2 is 1500 / 1500 = 100% return which makes sense (you doubled yuor money)

For the second period you started with 1500 and ended with 10210. All of the dividends were reinvested so for the account they are not flows

You profit for period 2 is (10210 - 1500) = 8710 and your average captial is 1500 so your return for this period is 8710 / 1500 = 580.67%

Now to combine the returns into 1 period you multiply the returns in a special way called linking. Before i do this for your portfolio let me diverge to an example to show the math easier. if you started with $100 and made 10% the first year you would have $110 (100 + .1*100). if you then made 10% the next year you would have $121 (110 + .1*110). Your return for the combined period is 21% (121 - 100) / 100. I can get the same return by linking the returns for each period. To link returns you multiply (1 + percent return / 100) for each period. To get the period return you then subtract 1 and multiply that result by 100.

In my example it would be (1 + 10/100) * (1+10/100) = (1.1 * 1.1) = 1.21 To get the return you would then (1.21 -1 ) * 100 = 21%

For your account it would be (1 + 100/100) * (1 +580.67/100) = (2) * (6.8067) = 13.6134. The return is 1261.33%. This is the unannualized return.

To annualize a return you take the linked value and raise it to the 1/# years power. In my example it would be (1.21)^(1/2) or 1.1. Subtract 1 and multiply by 100 to get the annual return of 10% (that make sense since my example was 10% each year).

Assuming your value is from the end of 2013
you return is (((13.6134)^(1/14))-1)*100 or 20.50%

That is a damn nice return.

[Spock]

Just an update and more thoughts on this.

As of April 2014 (the date of this thread)-the total of the Philip Morris investment with spinoffs and re-invested dividends was-see above for explanation
>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>
PM=$5,350
Altria=$2,670
Mondelez= $1415
Kraft= $775.
Rough Total =$10,210
>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>

As of today: it is

Altria=$4,764.85
Mondelez=$1,853.96
Kraft=$1314
PM=$6,981.89

Total=$14,915.33

$14,915.33 (today's Value) Minus $10,210 (April 2014 value) = $4,705.33 divided by "$10,210" = about 46% return since April 2014 on as plain a vanilla set of companies as you can come up with.

Obviously. the huge return is driven by the outsized dividends because of the long holding period (16 plus years) and dividend re-investment-the yearly dividend is now almost equal to my original investment.

Considering the reports that hedge funds (as a group) are doing really crappy,-even or slightly negative this year-an investment is boring old Kraft which has appreciated 15% this year (not counting dividends) looks pretty good.

As I do the math-Kraft has returned almost 70% since the original April, 2014 post.

With the current value (obviously, subject to change) of $14,915 and the original investment of $750-The total return (as I figure it) is almost 1,900 % in frickin' Philip Morris over 16/17 years.

As far as I could find, that beats Google since the 2004 (or whenever) IPO.

[Spock]

I have had a lot of hours in the combine lately-so I have a lot of time to think and I am doing a little re-jiggering of Dad's account.

This small holding cracks me up.

He has 2 shares of some sort of finance company that was spun out of another holding. I think the spinoff was about a year ago (October 1). The cost for the 2 shares is listed at $7.62. They are worth $53.31 today. That is a 600% return in one year.

The funny part is that the trading platform has that stock rated as a "D".

Part of me has always wanted to sell it just to clean up the account-but I have to hang to it-just to see what happens.

[gsabc]

If you're using Schwab as your trading platform, ignore their letter ratings. I get my investing info through The Motley Fool (www.fool.com). Some of my best performers, which were suggested by TMF, were and still are rated D and F by Schwab. On the flip side, some of their A-rated stocks have done diddly since purchase and are now my candidates to sell next.

I would go with the other ratings that Schwab lists on the stock information page. Those seem to be more accurate regarding future possibilities for growth.

[Bob Juch]

If you're using Schwab as your trading platform, ignore their letter ratings. I get my investing info through The Motley Fool (http://www.fool.com). Some of my best performers, which were suggested by TMF, were and still are rated D and F by Schwab. On the flip side, some of their A-rated stocks have done diddly since purchase and are now my candidates to sell next.

I would go with the other ratings that Schwab lists on the stock information page. Those seem to be more accurate regarding future possibilities for growth.

I moved from Schwab to E-Trade years ago.

[Spock]

If you're using Schwab as your trading platform, ignore their letter ratings. I get my investing info through The Motley Fool (http://www.fool.com). Some of my best performers, which were suggested by TMF, were and still are rated D and F by Schwab. On the flip side, some of their A-rated stocks have done diddly since purchase and are now my candidates to sell next.

I would go with the other ratings that Schwab lists on the stock information page. Those seem to be more accurate regarding future possibilities for growth.

I ignore them too. The rating just struck me as funny.

I have been watching and thinking about Alcoa ever since they got kicked out of the Dow. They are splitting into 2 companies at the end of the month-this may prompt me into a move-Date of record is October 20th. One is the commodities company and the other is more precision type metals.

I have made the decision to buy some in 2 of the kids' accounts by October 20th. They obviously have a long timeline. Not sure about Dad's account yet.

This is exactly the kind of thing that I like to be involved with-from the start-meaning-the split date of the 2 companies.