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FTSE 100 vs 250 tracker....???
King Lodos
Posted: 14 April 2018 13:40:35(UTC)
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Harry Trout;60593 wrote:
I may have thought of a way around Mr Helpful’s problem of the infinite CAGR. I imagine he is talking of a scenario where funds are withdrawn.

So, suppose I inject £10,000 into a new portfolio. Treat it as buying 10,000 £1 units in a fund called “Harry Trout’s Special Sauce”, ticker HTSS.

After 4 years HTSS has grown to £20,000, the 10,000 units now being worth £2 per unit. A CAGR of 18.92%. It is indeed special.

I need £15,000 so I sell 7,500 units. I now have 2,500 units worth £2 each and a portfolio worth £5,000 and on I go investing this from my luxury cruise holiday.

In terms of book cost I knock 7,500 units off my original cost, using the commonly adopted first in first out method. I now have an original investment in my spreadsheet adjusted for disposals of £2,500 which is now worth £5,000 being 2,500 units of £2 each. CAGR remains at 18.92%.

Does this work?


Not really.

This is a 'time weighted' return .. So it shows how well your stock picking did, but (as you say) isn't affected by inflows and outflows.

What if you'd put £100 in your fund before it rose over those 4 years .. THEN, emboldened, put £10,000 in just before the fund corrected 10%?

It would still show a decent CAGR, but you'd have lost money .. and if you kept investing and withdrawing at the wrong times, you'd wind up broke.

And this is exactly what most investors do .. They add and withdraw funds at the wrong times .. The average investor makes about 7-8% on stock or fund picking; but only 2% once you take inflow and outflows into account .. That's a huge gulf .. It shows how retail investors think: 90% of their focus is on which stocks or funds to buy; they mostly ignore the behavioural side.

Calculating your returns this way compounds problems, and is only useful for the fund industry
King Lodos
Posted: 14 April 2018 14:01:53(UTC)
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Tony Peterson;60597 wrote:
Aminatidi

Getting the timing not right, but almost right, does for me.

When GSK reached 1700 on the 19th June I sliced profitable shares out of my ISA every day of the week (at 1700, 1701, 1699,1712) and placed the proceeds in discounted repurchases in other companies which had become unpopular... Of course they have all been replaced since at 1281 in December, 1282, in February and 1296 in March, with the profitable proceeds and dividends from other companies . Works for me.

Found my 2007 tax papers while looking for a file for the new tax year. Noticed that our household investment income has more than quadrupled in 11 years. Wonderful world. I'm sure Loddy will play similar games when he actually manages to acquire some capital.



I'm sure you've done perfectly adequately from your investments.

But if you could buy and sell a laggard bond proxy like GSK to anything close to a 17% annual return, you'd be the best swing trader on the planet (if not a wizard – as I don't think it's mathematically possible) .. It would be like winning the Grand National on a seaside donkey.

People have problems calculating their returns .. There's no mystery here .. Other than the judgement of anyone who takes your claims seriously.
Tony Peterson
Posted: 14 April 2018 14:26:21(UTC)
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KL

You overlook one crucial fact - our GSK holdings are just one of twenty which all move around in glorious counterpoint so that one shares peak can be trimmed to fill another share's trough. Over and over. It goes like clockwork.
Thus our volatility harvest contributes even more to our growth of capital and income than the compounding of invested dividends.

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Kenpen2 on 16/04/2018(UTC)
Mr Helpful
Posted: 14 April 2018 14:48:25(UTC)
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Mr. Bennet: "It was very good of him to entertain us so eloquently with stories about his misfortunes (or fortunes?). With such narratives to hand, who would read novels?"
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King Lodos on 14/04/2018(UTC)
Harry Trout
Posted: 14 April 2018 14:49:14(UTC)
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King Lodos, thanks for your reply

I'm not offering up CAGR as the method for calculating investing returns but rather the one that I use linked to a lifelong portfolio target of 10% CAGR after all costs.

It's a method of calculating return that is working for me but may not appeal to all which is fair enough.
King Lodos
Posted: 14 April 2018 15:30:17(UTC)
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Tony Peterson;60607 wrote:
KL

You overlook one crucial fact - our GSK holdings are just one of twenty which all move around in glorious counterpoint so that one shares peak can be trimmed to fill another share's trough. Over and over. It goes like clockwork.
Thus our volatility harvest contributes even more to our growth of capital and income than the compounding of invested dividends.


I'm sure you're being genuine too.

But there's no known edge in doing that: trimming and dip-buying.

There are equal-weight ETFs that can take the whole FTSE100, and trim everything that's risen, and add to everything that's fallen – regularly, at effectively no cost – and you're lucky if they add 1.5% to an annual return, and that's mostly explained by holding more smaller companies.


The reason net worth is a much better calculation for an individual is this:

If your lifetime savings were a mere £100,000 .. 42 years compounding at 17% takes you to £120 million
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Tim D on 14/04/2018(UTC)
Tony Peterson
Posted: 14 April 2018 15:42:01(UTC)
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As you say, KL. The miracle of compound growth.

Pity that my lifetime savings 42 years ago were nearer £2000 than £100,000.

And you make me very thankful I do my investing directly and not with intermediaries.
King Lodos
Posted: 14 April 2018 15:50:45(UTC)
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Harry Trout;60609 wrote:
King Lodos, thanks for your reply

I'm not offering up CAGR as the method for calculating investing returns but rather the one that I use linked to a lifelong portfolio target of 10% CAGR after all costs.

It's a method of calculating return that is working for me but may not appeal to all which is fair enough.


It's what virtually everyone uses .. But it makes you focus on the fund industry, and not on your own investing behaviour.

When we look at what retail funds actually return to investors, as I mentioned, they average about 2% .. Which is far worse than most investors think they're doing.

I'd make the case for 'dollar-weighted' returns being far superior for assessing your own performance .. And net worth the most useful to assess your ability to build wealth .. And having the right measure is essential in developing the right behaviour.

Aminatidi
Posted: 14 April 2018 15:53:16(UTC)
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I thought what did for most people was their inability to simply do nothing?
King Lodos
Posted: 14 April 2018 16:12:31(UTC)
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Well doing nothing often isn't an option.

If you've got to invest, you might have to make decisions like whether to buy in a toppy market, sit it out in cash, or buy alternatives .. Likewise, when you need a new car, you can choose whether you buy a Mercedes or an old Ford.

You notice Warren Buffett – one of the richest men in the world – still lives in the modest house he bought in the 60s, and only recently replaced his decades-old car .. So he's someone who has investing behaviour very embedded in his personality .. And no surprise: Berkshire Hathaway effectively calculates its net worth (not its CAGR), so he's very aware of what his investing decisions actually do
Aminatidi
Posted: 14 April 2018 16:14:20(UTC)
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Sorry, was posting that in reference to your 2% comment earlier on the thread.

I thought the reason many investors see those kind of returns isn't because they pick bad investments but because they invest badly, if that makes sense.
King Lodos
Posted: 14 April 2018 16:17:53(UTC)
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Yep, that's it.

People get greedy and fearful at the wrong times, and they also dump weak funds and buy winners at the wrong times
Harry Trout
Posted: 14 April 2018 16:31:47(UTC)
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King Lodos

I make no withdrawals. I top-up collective investments that are doing well by reference to 10% CAGR and reduce / bin collective investments that are not doing well by reference to 10% CAGR. My top 10 non-cash investments account for roughly 60% of my portfolio currently, so it's a fairly concentrated approach as I currently have 20% in cash within Hargreaves Lansdown as a defensive measure.

On individual stocks (still a small part of my portfolio) I pick high quality, high momentum forever stocks and currently buy more of the things doing less well by reference to CAGR to build up my stakes. I may well adopt Tony's approach one day but haven't sold anything yet. I have 6 individual stocks and plan to restrict to 10.

In this way, CAGR works for me. It's elegant to my mind because you can compare it simply to the return you would get in the bank, as per my example above. And by zooming it into the future at 10% it is a 10 second job to predict where I might be at retirement in my investment portfolio based on that assumption.
Harry Trout
Posted: 14 April 2018 16:53:25(UTC)
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King Lodos;60616 wrote:
Well doing nothing often isn't an option.

If you've got to invest, you might have to make decisions like whether to buy in a toppy market, sit it out in cash, or buy alternatives .. Likewise, when you need a new car, you can choose whether you buy a Mercedes or an old Ford.

You notice Warren Buffett – one of the richest men in the world – still lives in the modest house he bought in the 60s, and only recently replaced his decades-old car .. So he's someone who has investing behaviour very embedded in his personality .. And no surprise: Berkshire Hathaway effectively calculates its net worth (not its CAGR), so he's very aware of what his investing decisions actually do

Well, the CAGR is calculated on page 1 of every set of Berkshire Hathaway accounts.

This is useful for those people who like to know how their investment in Berkshire Hathaway is doing. Preferable to trying to get to grips with rather academic treatises about book value.
King Lodos
Posted: 14 April 2018 17:21:40(UTC)
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Harry Trout;60621 wrote:
Well, the CAGR is calculated on page 1 of every set of Berkshire Hathaway accounts.

This is useful for those people who like to know how their investment in Berkshire Hathaway is doing. Preferable to trying to get to grips with rather academic treatises about book value.


CAGR's useful for assessing outside investments – that's why it's used..

But the fact your CAGR could be 17%, and your returns could be negative, clearly shows it's a rather academic measure
King Lodos
Posted: 14 April 2018 17:32:26(UTC)
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Harry Trout;60620 wrote:
King Lodos

I make no withdrawals. I top-up collective investments that are doing well by reference to 10% CAGR and reduce / bin collective investments that are not doing well by reference to 10% CAGR. My top 10 non-cash investments account for roughly 60% of my portfolio currently, so it's a fairly concentrated approach as I currently have 20% in cash within Hargreaves Lansdown as a defensive measure.

On individual stocks (still a small part of my portfolio) I pick high quality, high momentum forever stocks and currently buy more of the things doing less well by reference to CAGR to build up my stakes. I may well adopt Tony's approach one day but haven't sold anything yet. I have 6 individual stocks and plan to restrict to 10.

In this way, CAGR works for me. It's elegant to my mind because you can compare it simply to the return you would get in the bank, as per my example above. And by zooming it into the future at 10% it is a 10 second job to predict where I might be at retirement in my investment portfolio based on that assumption.


What you're doing is likely to be absolutely fine – so long as you don't start selling, or taking Tony's claims too literally .. (seriously.)

But being brutally honest, none of what you're doing makes any sense from a trading point of view .. None of it's likely to add value.

The real lesson of trading (and everyone assumes it's easier than it is) is that you can't make a higher return unless you're adding information to the system .. 'Top-slicing', range-trading, 'momentum forever'(?), is all for the fairies .. It's all nonsense that we convince ourselves works – but of course it doesn't .. And coming full circle: the overwhelming problem with CAGR (and time-weighted returns) is that you don't know how these strategies are actually affecting your returns – which allows you to pursue them as an expensive and pointless hobby
Harry Trout
Posted: 14 April 2018 18:29:50(UTC)
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Thank you King Lodos

I have set myself a simple challenge of 10% CAGR and am trying things to give myself the best chance of continuing to achieve that and just as importantly enjoy it along the way.

The moment I stop enjoying it I would probably put the lot on something like VWRL and could still do 10% anyway! 10% is the return I have chosen for the perceived risk (in my mind) of being in volatile stock markets.

I like what Tony proposes and as a cup half full kind of bloke I like to try his ideas out myself, in a modest way initially while I gain experience. You may think this makes me gullible, I think it makes me inquisitive and open minded.

Your post is interesting. I was chatting to a friend of mine recently who used to trade currency options in the city. He asked me what my edge was, what value I was adding - similar stuff to what you have just asked. I simply said I want to do 10% CAGR. He got it immediately - I'm not trying to beat anything or anyone, just achieve a number and have fun.

If you really do think it's all for the fairies it makes me wonder why so many of your posts are mantra based?
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dyfed on 14/04/2018(UTC)
King Lodos
Posted: 14 April 2018 18:49:19(UTC)
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'Edge' is exactly the question you've got to be able to answer .. What do you know that the market doesn't?

I put this to someone who'd made £2-300k in Bitcoin not long ago .. They gave a vague answer: take advantage of everyone else's greed and fear, sell high, etc.

And of course, like the old cliche: you're not stuck in traffic, you are the traffic .. If you don't understand that you're part of the market, and your behaviour is likely just as chaotic as everyone else's, you're just throwing money into a void and randomly grabbing it out again .. He soon gave those returns back to the market.

There are basically two kinds of Edge:
– Things you know about securities that the market doesn't (like insider information or specialist knowledge);
– Things you know about market behaviour that the market doesn't (market psychology).


Mantras are basically systems, and following systems usually beats following ideas and intuition .. Like the traffic example: your intuition is likely the same as every other inexperienced investor's .. Which means the things you do naturally are what every intelligent investor or investing algorithm is trading against.

The first step towards becoming a better investor, therefore, is usually becoming a more systematic or evidence-based investor .. Rather than trying Tony's method out with real money (that might represent years of earnings), why not approximate it using past market data?

https://www.portfoliovisualizer.com

Portfolio Visualizer's a great tool for testing investing, value and timing systems out .. It doesn't mean they'll work going forwards (you've really got to be able to answer the questions: Why did this work? and Why will it keep working going forwards?), but if they don't work on past data, they should be discarded immediately.
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philip gosling on 14/04/2018(UTC), Mr Helpful on 15/04/2018(UTC)
Harry Trout
Posted: 15 April 2018 09:40:44(UTC)
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King Lodos

Thank you for the clarifications over the weekend regarding CAGR. I think what I’ve drawn from this is that it can be an answer for measuring returns, it’s just not your cup of tea. And I have shown that you can make it work for you for outflows without creating an infinite answer; therefore not quite so mathematically dubious as forum readers might have been led to believe.

I also disagree with your view that it makes you focus on the fund industry, is only useful for the fund industry and is not of any use in assessing your investing behaviour (comments taken from 3 separate posts by you in this thread)

Take for example my investment in Hargreaves Lansdown, one of my forever high quality, high momentum investment stocks. I had an interesting learning experience with this share in 2011 when I bought a few and then bottled it and sold. I then starting gradually building a new position in 2012 and haven’t sold since. I have added regularly and have reinvested dividends but haven’t sold any since the rebuild from 2012.

The CAGR for my investment in Hargreaves Lansdown (taking account of additions and dividends) is 19.5% to the end of March 2018. That’s high, and it’s been higher looking at my monthly record. My last purchase was on 05/07/17 at 1,268p. As it’s now my largest single investment stock using X-ray on Hargreaves Lansdown (5%). I would need the price to be nearer to £15 before considering topping up again.

The CAGR calculation for individual investments is a doddle and copes perfectly well with disposals making sure to adopt a consistent method (first in first out being my preference).

Hargreaves Lansdown continues to wear its gold star and I shall pay attention to those last remaining parts of my portfolio that are showing CAGR less than 10%.

CAGR works for me.
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Mr Helpful on 15/04/2018(UTC)
Mr Helpful
Posted: 15 April 2018 11:06:42(UTC)
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Harry,
All good stuff, and a variety of approaches always find interesting.
Hope we are all here to learn, rather than constantly dispute.
In an earlier post you advised :-
"Each month I calculate the compound annual growth rate on my investments and compare to VWRL. Over time those that consistently underperform don't get topped up and may ultimately be sold. Those that out-perform get added to. I monitor how much of my overall portfolio is beating VWRL."

Such measurement presumably includes share price performance?
How does the method accomodate fundamentals getting behind or ahead of pricing, as it seems to with the proviso on HL?
Thanks.
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Harry Trout on 15/04/2018(UTC)
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