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A place for Get Rich Slowly readers to ask questions
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It is currently Fri Aug 01, 2014 11:37 pm




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 Post subject: Stock Portfolio 2
PostPosted: Sun Jan 13, 2013 6:56 am 

Joined: Wed Nov 07, 2012 6:21 am
Posts: 141
Here's the portfolio that I put together based on January 11, 2013's closing prices. There are 17 stocks in this portfolio, and it might be noted by some here that 8 of these stocks were previous recommendations of mine from the first portfolio.

Ticker Company 2013 01 11 Closing Price
AGM Federal Agricultural Mortgage Corp. 33.97
AIZ Assurant Inc. 36.19
AMED Amedisys Inc. 11.06
BAS Basic Energy Services, Inc. 12.20
BRP Brookfield Residential Properties Inc. 18.70
CLD Cloud Peak Energy Inc. 18.50
FBP First Bancorp 4.80
FFCH First Financial Holdings Inc. 13.68
GSBC Great Southern Bancorp Inc. 26.05
HMN Horace Mann Educators Corp. 21.25
PL Protective Life Corp. 30.41
RGA Reinsurance Group of America Inc. 55.66
RM Regional Management Corp. 16.69
SLM SLM Corporation 17.37
SMP Standard Motor Products Inc. 23.61
SUP Superior Industries International, Inc. 20.08
SYA Symetra Financial Corporation 13.45

So what indexes/funds do you want to use for comparison, kombat? Are we doing a straight comparison of performance with equal weights, or did you want to do a portfolio-based comparison like in the other thread? (With only 17 stocks in this portfolio, I don't mind the same 20k limit that the other portfolio had if you decide to go with making a portfolio)


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 Post subject: Re: Stock Portfolio 2
PostPosted: Mon Jan 14, 2013 5:52 am 

Joined: Tue Mar 11, 2008 12:19 pm
Posts: 1716
Location: Ottawa, Canada
You've got a nice mix of asset classes there, I think tracking that portfolio against the Dow Jones index would be a fair comparison, unless anyone else has any objections.


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 Post subject: Re: Stock Portfolio 2
PostPosted: Mon Jan 14, 2013 8:54 am 

Joined: Wed Nov 07, 2012 6:21 am
Posts: 141
I certainly don't mind that, but could you add some more things to compare it to? People tend to look at a 1v1 competition as more of a coin flip (random). I want several against it at once so people can really see the value of it. The Dow Jones Industrial Average is one of several measurements I use against my portfolios and it hasn't beat my portfolios yet.


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 Post subject: Re: Stock Portfolio 2
PostPosted: Mon Jan 14, 2013 10:51 am 

Joined: Tue Mar 11, 2008 12:19 pm
Posts: 1716
Location: Ottawa, Canada
You're remembering to account for "friction" expenses such as trading fees and commissions, right?


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 Post subject: Re: Stock Portfolio 2
PostPosted: Mon Jan 14, 2013 11:27 am 

Joined: Fri May 04, 2007 8:14 pm
Posts: 1768
kombat wrote:
You're remembering to account for "friction" expenses such as trading fees and commissions, right?

And taxes for capital gains when things are sold. Let's not forget those.


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 Post subject: Re: Stock Portfolio 2
PostPosted: Mon Jan 14, 2013 12:12 pm 

Joined: Tue Mar 11, 2008 12:19 pm
Posts: 1716
Location: Ottawa, Canada
VinTek wrote:
kombat wrote:
You're remembering to account for "friction" expenses such as trading fees and commissions, right?

And taxes for capital gains when things are sold. Let's not forget those.


I omitted those because those would apply for a portfolio comprised entirely of low/no-fee index funds, too. If we're comparing returns of a stock-picking portfolio against an index portfolio, then we can ignore things like taxes and inflation that apply equally to both portfolios.


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 Post subject: Re: Stock Portfolio 2
PostPosted: Mon Jan 14, 2013 12:36 pm 

Joined: Fri May 04, 2007 8:14 pm
Posts: 1768
kombat wrote:
VinTek wrote:
kombat wrote:
You're remembering to account for "friction" expenses such as trading fees and commissions, right?

And taxes for capital gains when things are sold. Let's not forget those.


I omitted those because those would apply for a portfolio comprised entirely of low/no-fee index funds, too. If we're comparing returns of a stock-picking portfolio against an index portfolio, then we can ignore things like taxes and inflation that apply equally to both portfolios.

But isn't that what we're doing: comparing the OP's stock picking against an index (which has minimal trading)?


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 Post subject: Re: Stock Portfolio 2
PostPosted: Mon Jan 14, 2013 12:57 pm 

Joined: Tue Mar 11, 2008 12:19 pm
Posts: 1716
Location: Ottawa, Canada
VinTek wrote:
But isn't that what we're doing: comparing the OP's stock picking against an index (which has minimal trading)?


Yes, of course. But my point is that you must consider the impact of fees and commissions, because they'll retard the rate of return of an actively-traded portfolio. They have virtually no impact on a portfolio of index funds.

However, we can ignore taxes on capital gains, because they'll apply to both portfolios. Including them doesn't change the end result, and only complicates the comparison.


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 Post subject: Re: Stock Portfolio 2
PostPosted: Mon Jan 14, 2013 5:37 pm 

Joined: Wed Nov 07, 2012 6:21 am
Posts: 141
Of course I did. The minimum that my portfolios older than 6 months beat the original competition I set for it was by several percentage points, which included the Dow Jones Industrial Average. Of course, I didn't use dividends in calculating this as the indexes do not show dividend results. Here's the difference in how my portfolios compared to the DJIA (INDEXDJX:.DJI) before any expenses and not including dividends. I believe you'll agree that the sheer difference in performance shows that even with fees and taxes calculated in, these would have been beating the DJIA as of the first of the year.

(Completed its 1-year simulation)
2011 12 02 stock portfolio : 59.98%
DJIA comparison : 8.37%

2012 03 30 stock portfolio : 7.92%
DJIA comparison : -.82%

2012 04 04 stock portfolio : 10.86%
DJIA comparison : 0.22%

2012 04 16 stock portfolio : 16.26%
DJIA comparison : 1.41%

2012 04 20 stock portfolio : 16.86%
DJIA comparison : 0.57%

2012 04 24 stock portfolio : 17.62%
DJIA comparison : 0.79%

2012 05 04 stock portfolio : 28.34%
DJIA comparison : 0.51%

2012 05 18 stock portfolio : 31.49%
DJIA comparison : 5.94%

Going on to those portfolios that are less than 6 months old:

2012 07 13 stock portfolio : 16.17%
DJIA comparison : 2.56%

2012 08 31 stock portfolio : 7.14%
DJIA comparison : 0.10%

2012 09 21 stock portfolio : 4.02%
DJIA comparison : -3.50%

2012 11 01 stock portfolio : 3.55%
DJIA comparison : -0.97%

(My first portfolio posted in this forum) - I went to http://www.google.ca/finance/historical?q=INDEXDJX%3A.DJI&ei=4aL0UND3B8rWrQHjQQ&start=30&num=30 to get the November 8th opening price. This is the only portfolio using the next day's prices to calculate.
2012 11 07 stock portfolio : 3.71%
DJIA comparison : 1.32%

2012 12 01 stock portfolio : 3.31%
DJIA comparison : 0.60%

So as you can see, all my portfolios completely dominate the DJIA. (which is why I would like more competition against my portfolio than this one measurement)


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 Post subject: Re: Stock Portfolio 2
PostPosted: Mon Jan 14, 2013 5:40 pm 

Joined: Wed Nov 07, 2012 6:21 am
Posts: 141
And yes, all the portfolios are done on a pure equal-weighted terms (except the November 7th portfolio), which could send the profit slightly up or down depending on how it ending up being converted into a portfolio. However, I think you will agree that whatever brokerage fees and taxes were applied, my portfolios are clearly showing superior returns to the DJIA (and please remember that those results did not contain any of the dividends either). The November 7th portfolio is based on the portfolio compared to the original value of the portfolio stocks. The actual performance of that portfolio with its dividends and expenses as of the first of the year is 3.65%, a very small difference from what is posted above.


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 Post subject: Re: Stock Portfolio 2
PostPosted: Mon Jan 14, 2013 6:25 pm 

Joined: Wed Nov 07, 2012 6:21 am
Posts: 141
So how did you want to run this competition? Same as the other, with a portfolio with a specific number of each stocks, or equally weighted and results adjusted by the amount of money needed for expenses?


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 Post subject: Re: Stock Portfolio 2
PostPosted: Wed Jan 16, 2013 1:18 pm 
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Joined: Wed Sep 23, 2009 9:01 am
Posts: 5310
Matthew Clinger wrote:
So as you can see, all my portfolios completely dominate the DJIA. (which is why I would like more competition against my portfolio than this one measurement)


And as I can also see, you seem to be entirely ignorant of how to make these kinds of comparisons. The DJIA was up various amounts during the periods in question and has a beta of about 1. Your portfolios all have much higher betas so they would be expected to have higher returns. But let's see what happens in a down market.

You also exclude dividends which is hardly fair since the DJIA yields somewhere around 3%. And your comparison periods are so short in many cases that most of the difference can be attributed to dividend accumulation.

As I said before, I suspect you will "win" any challenge like this on a raw basis because your portfolios are much riskier than the index. But risky portfolios should return more on average so that is not evidence of your skill. If you want to impress you'll need to learn how to and make the effort to adjust for risk, dividends, and other things that get very tedious and complex.


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 Post subject: Re: Stock Portfolio 2
PostPosted: Wed Jan 16, 2013 4:49 pm 

Joined: Wed Nov 07, 2012 6:21 am
Posts: 141
Well, I use Google Finance charts for that information. If you care to correct it, go ahead. My portfolios had dividends, too. But, not seeing dividends on the DJIA chart, I wasn't about to add them in as adding dividends to one side and not the other would be unfair.

And, according to "What Works on Wall Street", portfolios that are based on value investing using multi-factor models tend to have lower betas. (examples found on pages 320, 333, and 337.)

Now, perhaps you are talking about individual stocks, but a portfolio's beta can clearly be quite different than looking at them individually.

Have you ever considered using something like the sharpe ratio or the sortino ratio when considering how risky an investment is? From 1964 to 2009, the sharpe ratio for all those stocks under consideration in the book (those worth $200 mil+ in 2009 dollars) was .33 and the sortino ratio .09 (higher is better for these numbers). During the same period, the sharpe ratio was .30 and the sortino ratio -.05 for the S&P 500. Compared to these, the first composite of value factors in the book had a sharpe ratio of .67 and a sortino ratio of .53, suggesting that it was far safer than either of these two options.

Most people are so caught up in thinking "risk = reward" that they can't see this in untrue. Value investing has higher returns and lower risks. The data in the book covers more than 40 years of data, so it isn't just some anomaly from a single year that somehow created a fluke. The rate of return was higher for the composited value factors and the standard deviation was less at the same time. Realizing that such things are what affect the above two ratios (which some use to gauge how safe something is), it should come as no surprise that the result of greater profits and lower deviation on that profit creates higher sharpe and sortino ratios.


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 Post subject: Re: Stock Portfolio 2
PostPosted: Wed Jan 16, 2013 5:02 pm 
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Joined: Wed Sep 23, 2009 9:01 am
Posts: 5310
Matthew Clinger wrote:
Well, I use Google Finance charts for that information. If you care to correct it, go ahead. My portfolios had dividends, too. But, not seeing dividends on the DJIA chart, I wasn't about to add them in as adding dividends to one side and not the other would be unfair.


You can't just decide to include of not include dividends based on what is convenient to you. AA, AXP, BA, and BAC, the first 4 DJIA components in alphabetical order, pay dividends as I'm sure others do. You've got to do the work to account for those properly if you want your analysis to have any meaning.

Matthew Clinger wrote:
And, according to "What Works on Wall Street", portfolios that are based on value investing using multi-factor models tend to have lower betas. (examples found on pages 320, 333, and 337.)

See below

Matthew Clinger wrote:
Now, perhaps you are talking about individual stocks, but a portfolio's beta can clearly be quite different than looking at them individually.

A portfolio's beta is basically a weighted average of the individuals if there is no correlation. Your portfolios are highly correlated because they include a lot of companies in the same industry. So you'll need to manually compute your portfolio variances.

Matthew Clinger wrote:
Have you ever considered using something like the sharpe ratio or the sortino ratio when considering how risky an investment is? From 1964 to 2009, the sharpe ratio for all those stocks under consideration in the book (those worth $200 mil+ in 2009 dollars) was .33 and the sortino ratio .09 (higher is better for these numbers). During the same period, the sharpe ratio was .30 and the sortino ratio -.05 for the S&P 500. Compared to these, the first composite of value factors in the book had a sharpe ratio of .67 and a sortino ratio of .53, suggesting that it was far safer than either of these two options.

Sharpe ratio is good. But you'll need to compute it for YOUR portfolio to have any credibility. Just parroting what a book claims is not enough.

Matthew Clinger wrote:
Most people are so caught up in thinking "risk = reward" that they can't see this in untrue. Value investing has higher returns and lower risks. The data in the book covers more than 40 years of data, so it isn't just some anomaly from a single year that somehow created a fluke. The rate of return was higher for the composited value factors and the standard deviation was less at the same time. Realizing that such things are what affect the above two ratios (which some use to gauge how safe something is), it should come as no surprise that the result of greater profits and lower deviation on that profit creates higher sharp and sortino ratios.


Look into something called the "Security Market Line" in the CAPM. You might learn something including why your portfolio probably will do better in an uptrending market and worse in a downtrend. You'll also learn that it's more like reward= C*risk+Rrf


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 Post subject: Re: Stock Portfolio 2
PostPosted: Wed Jan 16, 2013 5:23 pm 

Joined: Tue Mar 11, 2008 12:19 pm
Posts: 1716
Location: Ottawa, Canada
Matthew Clinger wrote:
Most people are so caught up in thinking "risk = reward" that they can't see this in untrue. Value investing has higher returns and lower risks.


If there really were truly a way to achieve higher returns with lower risk, then why wouldn't EVERYBODY do it? With the literally trillions of dollars involved with the markets, don't you think people flock to such a model?

If it really works, then why isn't everybody doing it? There are only three possible reasons.

1) It's a secret and you just blew it.
2) Everybody is stupid.
3) It doesn't actually work.

You appear to believe explanation #2 is the reason, and you're here to "educate" us.

Good luck with that.


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