Performance and New Features on the Way

The performance table on the sidebar was taking too much space so I will simply be sharing my recent trades and their results several times a month. Feel free to check out the Excel or html file detailing my transactions and month-to-month performance. I am happily back atop all of the major indices, which puts me several steps closer to achieving several of my 24 goals!

With that being said, I hope to dedicate the next several posts to individual stock recommendations. I spent about a month getting the personal finance tips off my chest, but it's time to get back to good ole investing!

As a side note, I would like to thank everyone who continues to read and contribute to my blog. I am hoping that this site will not only serve as a motivation tool for myself, but also a source of reference and knowledge for others.

Links for Friday

This Weeks Links:

• Free Money Finance shares an awesome way to get a double tax deduction. What you basically do is sell your losing stocks and use the money to contribute to your IRA.
• Ask the Advisor describes the different retirement options for the self employed. I found this to be pretty helpful since I may be starting my own business someday.

A Post from the Past

• Learn even more about assessing the success of your investments in April's post: Evaluating Investment Performance: Part 2 of 2.

Links for Friday

I am a little late with these, but they are still quality links!

This Weeks Links:

• The Businesspundit writes a really good article comparing one of my favorite movies, The Shawshank Redemption, to being a successful entrepreneur.
  
• Get Rich Slowly offers a great series of arguments around the argument between prepaying on your mortgage or investing the extra income.

A Post from the Past:

• Learn more about assessing the success of your investments in April's post: Evaluating Investment Performance: Part 1 of 2.

New Look

I have tinkered with the html a bit to offer a more RSS friendly blog. In doing so, I also decided to switch my template to a more neutral arrangment of blues. My net worth entry has also been updated and my performance charts will be updated soon.

Thanks for reading!

A Recap of Prior Plays

I felt obligated to share the performance of the trades I proposed on this blog. I went all the way back to my November posts (which apparently I was doing my best work) and found how each pick turned out.

The table below shows the performance of my November 10th picks. I simply assumed the investor would have bought shares at the closing price on November 10th and sold the stock after the week was over, sometime around November 15th.

The table below shows the success of my IPO evaluation on November 15th. For these stocks, I assumed the investor initiated a market order when these stocks started trading and sold the stocks at the end of the day.

The table below highlights my most recent round of earnings plays. Like all earnings plays, I assumed the investor bought the stock sometime after the post or around the close before the earnings report and sold the stock the next day sometime around the close.

The last table is my recently recommended "technical analysis" stock. I will try to add more of these as I learn more about TA.

You can interpret these tables however you like, just thought I would throw them out there.

Evaluating Investment Performance: Part 2 of 2

In a couple days I will be sharing my year-to-date investment performance (oh yea) but before I do so I want to finish up this series on investment performance indicators. In Part One of the series I discussed different ratios that measure excess return from the amount of risk you are taking on. The key point with these ratios is that investor A may have a higher return than investor B, but investor B may be more talented because he/she is taking on significantly less risk than investor A.

Another performance measure I want to introduce measures an investor's ability to time bull/bear runs successfully. The main concept behind these measures simply state that an investor should bear more risk (have a higher beta) when the market is doing well and bear less risk when the market is doing poorly. This standard equation used to measure timing ability:
Ri,t – RF,t = ai + βi,M (RM,t – RF,t) + βi,MM (RM,t – RF,t)2. Where the left side of the equation signifies the excess return of the portfolio, the yellow text shows the market's excess return, and the green text signifies the squared market premium. The equation simply shows that if your squared market premium (green factor) is positive, you are doing a good job.

Here's a quick example. Let say the market went down 10% this year and investor A shorted the market with a beta of .5 and investor B went long in the market with a beta of 1. Investor A would have a positive timing component because he has a negative beta by going short in a market with negative returns, while investor B would have a negative timing component because he has a positive beta in a market with negative returns.

There are an array of other ways to measure performance, but I think these two are the most widely used. Again the goal of this series of posts was to instill the point that talent in investing is not solely measured in your percentage return, but how you are performing in the face of risk and how you are performing in the current market climate.

Evaluating Investment Performance: Part 1 of 2

As many of my readers know, I love comparing individual stocks. I think it is important to evaluate stocks against one another. While all great investors do this, I do not like comparing portfolios against one another. It seems that comparing portfolios just gets too personal sometimes. While returns do give you some insight into your talent as an investor, often times they do not tell the whole story. My next series of non-stock-picking posts will be examining how to properly evaluate your performance of an investor.

Two of the most common measures of performance are the Sharp ratio and Treynor ratio. The core fundamentals behind these two measures are tracking the expected return of a portfolio over the risk the portfolio. The only difference in the calculations of these two portfolios is the value that risk takes on. The Sharp ratio is found by taking the return on your portfolio, less the risk free rate (rate of a T-Bill for example) all divided by variance in your portfolio's holdings. The Treynor ratio is found by taking that same return on your portfolio, less that same risk free rate, divided by the average beta in your portfolio (Beta can be found on Yahoo! Finance).

A talented investor is an investor that has the ability to achieve returns in excess of the average return given his/her portfolio's risk level. Let's say Investor A has achieved returns of 20% while maintaining a portfolio beta of 2 and let's say Investor B has achieved returns of 8% while maintaining a portfolio beta of .5. Who is the better investor?

Let's look at Treynor ratios. Assuming a risk free rate of 3%:
A has a ratio = (20%-3)/2 = 8.5
B has a ratio = (8%-3)/.5 = 10
Investor B is actually has a better reward-to-risk ratio and is essentially more talented as an investor.

So next time when you compare returns, you may want to look into which investor has the higher reward-to-risk ratio as well.