How is Your Stock Picking Working? How to Measure Your Returns.


jam

Most people who’ve been trading stocks for a while think that they are excellent stock pickers.  They will have all sorts of stories of stocks that they bought and then turned around and made a quick profit.  Or maybe they have a stock or two that they’ve held for ten or twenty years where they have a 500% or even 1000% profit.  They forget about the losers they’ve had.  The stocks that went nowhere.

Really, if you honestly compare your returns to “the market,” many people will find that they would have been better off just investing in a set of mutual funds and following “the market” than they were investing on their own in individual stocks.  But how do you tell?

Well, one common way to judge your performance is to compare your returns against those of an appropriate index.  For example, if you were buying individual stocks, you might compare your progress against the returns of the S&P500 or S&P100 index.  If you were buying small stocks, you might compare your returns against the Russell 2000 index.  You could also compare your performance against the return of index funds, such as the Vanguard Total Stock Market Index fund or the Vanguard S&P500 Fund.

Of course, comparing year against year does not always give the clearest picture.  For example, here are the returns for the S&P 500 for the last five years, along with the returns for one of my accounts:

S&P 500:

Year Return
2016 8.02%
2015 -0.73%
2014 11.54%
2013 29.60%
2012 13.29%
2011 0.00%

 

My Account:

Date Return
2016 6.28%
2015 0.15%
2014 20.73%
2013 27.16%
2012 7.40%
2011 4.84%

Note, to calculate these returns, I just subtract the value at the start of the year from that at the end of the year, then divide the result by the value at the start of the year.

Looking at the returns together, you see that I beat the S&P500 in 2011, 2014, and 2015, but the S&P500 won out in 2012, 2013, and so far in 2016.  Should I have just invested in index funds, or is my stock picking actually doing something useful?  Well, let’s look at thing s a different way.  Let’s say that I invested $1.00 in the S&P500, and also invested $1.00 in my portfolio.  Here are the results:



S&P 500:

Year Return Value of $1 Invested
2016 8.02% $1.76
2015 -0.73% $1.63
2014 11.54% $1.64
2013 29.60% $1.47
2012 13.29% $1.13
2011 0.00% $1.00
Start of 2011 $1.00

My Account:

Date Return Value of $1 Invested
2016 6.28% $1.84
2015 0.15% $1.73
2014 20.73% $1.73
2013 27.16% $1.43
2012 7.40% $1.13
2011 4.84% $1.05
Start of 2011 $1.00

To calculate these results, I multiplied the value at the end of the previous year by one plus the return for the present year,  For example, the 2012 value is just:

($1.05)*(1+0.740) = $1.13.

Now it is clear that I’m beating the S&P500 over the period.  If you had invested $1.00 in the S&P500 at the start of 2011, you would have $1.76 now, where by investing in my portfolio over the same period,  you would have $1.84.  This isn’t much of a difference, but it does show that my efforts at least do mean something.  A lot of mutual fund managers do not beat the S&P500.  My values also include my brokerage costs and account fees, where the indexes include no fees.  It might be more fair to include representative fees in the indexes as well when doing your own comparison.

Another thing to consider is the time period over which you’re comparing.  My investing style, which I consider to be the only style worth doing if you’re picking stocks, is long-term investing.  I could not tell you which stocks will do better over a year or two, but I can do pretty well at picking stocks that will do well over five or ten years.  The fact that I beat the S&P500 in 2011 therefore meant little.  It was just good luck.  It also didn’t matter that the S&P500 did better than me in 2012.  Now that we have five years under our belts, however, we can start to make some real comparisons.  Comparisons at ten years would make even more difference, since that will allow my stock picks to really flourish, hopefully, and outpace the market in general.

But, wait a minute, you may say.  If you need to wait five or ten years to decide if what you’re doing is working, isn’t that a lot of time lost?  After all, you don’t want to go for 20 years, only to discover that you’re a bad stock picker and would have been better off in an S&P500 fund.  The answer is that you don’t need to choose one or the other.  Instead, put your 401k funds and a good portion of your taxable portfolio into index funds.  At the  same time, pick a few individual stocks that you think will shine over long periods of time, buy substantial quantities (acquiring 500 to 1000 shares over a period of time).  You will then be playing both sides.  If you’re a bad stock picker, your index funds will bail you out.  If you’re a good stock picker, your individual picks will add to the returns from your index funds, perhaps substantially if you catch something like the next Home Depot or Microsoft.  It doesn’t have to be an either-or proposition.

Questions?  Comments?  Let me know what’s on your mind by using the comment form below!

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Disclaimer: This blog is not meant to give financial planning advice, it gives information on a specific investment strategy and picking stocks. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

 

Best Single-Stock Investing Posts


The Small Investor Blog is a big place with a lot of good information.  The trouble is, it can be hard to find the information you want since there are a lot of posts.  This is the first in a series of posts designed to lead you to what I consider to be the best posts on a given topic.

This first series is a group of posts related to single stock investing.  These are for those who want to buy and sell single stocks and want to learn how to do it.  If you want to find the best posts I’ve written on single-stock investing, here’s a list of my favorites:

Why buy individual stocks?

Before you think about single stock investing, get your accounts in order.

Become an investor, not a speculator.  Here’s the difference.

Common mistakes you should avoid.

How many shares should you buy?

How many different stocks should you buy?

Learning the different types of stock orders.

Learn which stocks to choose.

Learn about value investing.

Learn about momentum investing.

Learn to catch a falling knife.

You can beat the markets.  Here’s how.

Knowing when to Double Down. Knowing When to Fold.


leverage
Let’s face it, bad stocks happen to good people.  A couple of years ago I discovered a company called The Container Store.  It was a relatively new company with just a short history of earnings.  Normally I like to buy older companies that have  a history, but I thought that I could get in on the ground floor for once.

So I bought a couple of hundred shares. Then I bought a couple of hundred more.  Then I bought some shares in an IRA account.  I was all in, waiting for the shares to move up as they expanded stores and people realized what a great company they were.

Then they started falling.  They fell from about $20 per share where I bought them down to $10 per share.  At this point, I decided to double down – to buy more shares at the lower price.  The advantage here is that when the stock starts to recover I’m making a gain rather than just making my way back to the level at which I bought the stock.  I thought surely this was just a fluke, that it was a good company, and things would recover.

Then it fell down to $5 per share.  Then it rose a bit.  Then it fell again.  Today it sits at about $4.75 per share.

One of the things I did at that point is to take the loss so that I could offset some gains I had on other positions.  Because I wanted to keep a position in the stock, I went ahead and purchased additional shares, then waited for about six months, then sold my original shares, locking in the loss.  Note that I had to wait at least 30 days after I bought the additional shares or it would have been a wash sale, which would mean I would not have been able to write it off on my taxes.

I bought the additional shares at about $4.50 per share, so I have a small gain on the new shares. Rather than buying more shares and taking the risk of an even bigger loss if the shares fell before the 30-day holdign period was up, I could have also sold the shares I had at a loss and then waited 30 days before purchasing more shares to avoid a wash sale.  I decided that it had fallen enough that it probably didn’t have much farther to go.  Of course, bad things sometimes happen….

So in The Container Store, I averaged down at $10 per share, and then again at $4.50 per share (at least for a few months).  Now that things have risen a little, the worst may be behind me.  Of course, I had shares of Pacific Sunware that bounced around between $2 and $6 for a couple of years before they finally declared bankruptcy.  They are now almost worthless.  I bought about 400 shares at $2 per share, waiting for the stock to recover again, but it never did.  I ignored the advice of my broker to take the gain and rode them right down to the floor.

In general, if a position takes a big hit like this, I let the dust settle (the damage has already been done – no reason to rush out and sell).  I look at the fundamentals of the company and also the trends in the whole industry.

  1. If the whole industry is down, I usually hold my position or buy more.
  2. If just the company I bought into is down, I look to see if something fundamentally has changed or if they just had a misstep.  If the latter, I will hold on or maybe buy more.  If the former, I sell out.

Of course, Kenny Rodgers said you need to know when to hold ’em, know when to fold them.  With individual stock buying it is more trying to be in the big winners before they become big and to ride them all of the way up.  Sometimes this means just holding onto some losers along the way, since folding early could make you miss out on something big.  I therefore tend to hold on and buy more rather than cash in,  Really, it all depends on what the fundamentals are telling me.

Got an investing question? Please send it to vtsioriginal@yahoo.com or leave in a comment.

Follow on Twitter to get news about new articles. @SmallIvy_SI

Disclaimer: This blog is not meant to give financial planning or tax advice. It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.