Category Archives: Analyzing performance

analyzing your portfolio performance over the past three months

October 7, 2011 By in Analyzing performance, Fixing mistakes, How often to measure, Portfolio management, Strategy, Why measure performance? Tags: , , , , , Leave a comment

measuring performance

I’ve written before about how important it is for us as stock market investors to calculate and analyze the performance of our portfolios on a regular basis.

There are two related reasons for doing this:

1.  We want to identify what ideas/stocks are working for us in the portfolio and which ones aren’t.  Based on this, we decide where to take profits and where to stop the bleeding.

2.  We also want to learn about ourselves, and our strengths and weaknesses in decision-making.  This isn’t like training for the Olympics.  We don’t need to be perfect at everything.  But we want to at least be able to identify situations where we continually shoot ourselves in the foot–and just not do that anymore.

doing it now

On July 7th, the S&P 500 closed at 1353.  On October 3rd, it closed at 1099, for a decline of 18.8%.  On an intraday basis, from 7/7-10/4 the fall was 21%.

The markets appear to be stabilizing now, as politicians in Europe make noises about finally addressing the EU’s Greece/banking crisis.  It’s too soon to say for sure that the worst is over (although I suspect it is).  But whatever the case may be, it’s important to look at your portfolio after a decline of this magnitude and ask yourself how you fared.

how to do it

In all likelihood, you don’t have data from your brokerage account that tells you either what your portfolio as a whole, or any individual security in it, was worth on the beginning and end dates.  So the easiest way to proceed is to use a Google chart to compare the performance of the S&P 500 (or whatever benchmark you measure your portfolio against) with each of the stocks/mutual funds/ETFs you own.  You can find more details toward the end of my post on “method to the madness” a few days ago.

what to look for

1.  One question is whether you’ve outperformed or underperformed the benchmark. But that’s just the start.

2.  Growth investors outperform in up markets and underperform when the market is declining.  Value investors, who have a more defensive bent, do the opposite.  So a second question is whether your portfolio has performed in line with your design.

3.  Is your design really what you wanted?  Is it appropriate for your financial circumstances, or is it too risky–or not risky enough (not the usual problem, but possible)?

4.  What were your strongest and weakest stocks?

5.  Is there a pattern to either the good ideas or the bad ones?  Be careful here.  Over this period, utilities stocks would have been stellar names, capital goods or materials stocks were probably at the bottom of the pile.  That’s not what I mean. You’re looking for behavioral patterns that lead you astray so that you can change them.

Do the weak stock ideas come from names you hear on CNBC?  Are the good names ones where you know the financials backwards and forwards and the bad ones those you know less well?  Are the horrible stocks tips from cousin Fred the broker?  Are the large positions winners and the small positions losers–or the reverse (which would be a more serious issue)?

Some fixes are easy:  turn off the TV; do your homework; don’t act on Fred’s advice; don’t bother with the small positions (or weight each position equally if the small ones are good but the big ones are killing you).

6.  How are your positions doing in the rebound?  Stocks rarely outperform in both up and down markets.  Great if you have one or more of these.  In contrast, in my experience it’s a big red flag if a stock underperforms on the way down and remains an underperformer in a market bounce.  Any like these are ones that need your immediate attention.

7.  Are the reasons you bought each security still valid?

two other thoughts

–Looking at your portfolio decisions with a critical eye is something you need to do regularly.  One time won’t be enough to detect behavior patterns.  But you’ve got to start somewhere.  My experience is that even professionals make mistakes that would be easy to correct–like “don’t listen to Fred”–except that they aren’t aware they’re making them.

–For an analysis like this, don’t use year-to-date numbers.  What you want to see is how your stocks have done in the downturn.  Otherwise, if you have had significant under- or outperformance earlier in the year, that performance difference will just muddy the waters.  An example:

Suppose you have a security/portfolio that was 20 percentage points ahead of the S&P through July 7th.  That would mean you had a gain of 27.7%.  On October 3th, your holdings are down 2.7%, which is ten percentage points better than the market.  How much performance have you lost during the downturn?

The answer isn’t ten percentage points.  It’s five!  During the period we’re considering, the S&P 500 fell by 18.8%.  Your investment went from 127.7 to 97.3.  That’s a fall of 23.8%.  The difference between the fall in the index and in the investment is five percentage points.  The rest of the year-to-date loss comes from the fact that the investment has lost its 18.8% from a starting point that already incorporates a large year-to-date gain.  The gain portion also suffers a loss.

S&P 500: method to the madness?

September 22, 2011 By in Analyzing performance, Constructing a Portfolio, Current Market Thoughts, Portfolio management, Recent Market Action, Strategy Tags: , , , , , , , , , Leave a comment

recent S&P 500 performance

The S&P 500 hit a near-term low of 1101, intraday, on August 8th.  It has bounced between 1140, the close on that day, and 1230 since.

what’s going on?

I think(see my dipping a toe in the water posts from early August) that investors are adjusting to the (strong) possibility that economic growth in the developed world will be little changed in 2012 from what it was in 2011.  This contrasts with the prior belief of the consensus (and me, too) that the economic acceleration we saw in 2009 and 2010 wouldn’t peter out completely but would continue to some degree into next year.

The market has alternated between bouts of euphoria and despair–sometimes, like yesterday, both emotions in the same trading session.  On the one hand, corporate profits remain very good; on the other, Greece may default on its debts, messing up the EU, and the Fed has just begun another round of unconventional action to try to restore a stronger pulse to the US.  What the market is taking from the Fed move is that the US needs the stimulation, not that the Fed is riding to the rescue.

testing the lows today?  …probably

Given the sharp selloff in Asia and Europe as I’m writing this on the morning of the 22nd, we appear to be about to see in the US whether the closing low of 1140 will hold.

below the surface, …

Look a bit deeper into the market action, however, and a more complex pattern emerges.  You can look for others yourself, as I’ll explain below.

…big differences among individual stocks,

which means to me that most investors are not as panicky as the index movements might suggest.  This is what I see  (percentage stock price changes since August 9th through Tuesday, with the index up 4.2%):

retail is mixed, with the high end doing well

Tiffany     +15.9%

Dicks Sporting Goods     +13%

Macy     +8.3%

Wal-Mart     +4.9%

JC Penney     +2.7%

Ford     +.4%.

tech–e-commerce, Apple and takeovers

Yahoo     +25.9%

Amazon     +19.7%

E-Bay     +19.6%

AAPL (which it an all-time high two days ago)     +16.7%

Oracle     +13.5%

Intel     +9.0%

Adobe     +4.1%

IBM     +4.0%

Microsfot     +2.5%

Netflix     -43.3%

financials- -ugh!!

GE     +.3%

Bank of America     -2%

Citi     -8.7%

JP Morgan Chase     -10.9%

staples–so-so

P&G     +6.3%

Coca Cola     +1.8%

Pepsi     -3.5%

casinos–high-quality/debt under control

Las Vegas Sands     +29.2%

Wynn     +16%

MGM     -6.3%

no joy in Macau, despite blowout revenue growth

China Sands     -2.8%

Wynn Macau     -6.2%

SJM     -14.7%

MGM China    -15.1%

other random stocks

Catipillar     -3.9%

Exxon Mobil     +2.5%

Intercontinental Hotels     +1.7%

doing this for you portfolio

It’s a worthwhile procedure to do  regularly.

Go to Google Finance and call up a chart for the S&P 500.  The symbol is .inx.  (I normally prefer Yahoo Finance charts, but this is one instance where Google works better.)

Enter a stock symbol into the Compare box just above the chart and hit the Add button.  The chart parameters will change; you’ll see absolute performance numbers for both the S&P and your stock appear.

For checking performance since August 9th, select a 3mo view from the Zoom choices at the top of the chart..

Move the left-hand side of the bar that’s directly under the chart to the right until the chart shrinks to the time period you want.

Type in more symbols.  You’ll see their absolute performances (on a capital changes basis, not that it matters so much) displayed in different colors.

Good luck.

Good or bad, you’ll at least know how your stocks are doing.

two tricks of performance calculation arithmetic

August 19, 2011 By in Absolute vs. relative performance, Analyzing performance, Constructing a Portfolio, Current Market Thoughts, Portfolio management, Recent Market Action, Trading Tags: , , , , , , , , Leave a comment

measuring performance

The acid test of active management–both of our own efforts and of the professionals we may hire to invest for us–is whether they add value versus an appropriate index.  Picking the benchmark against which to measure results is a pretty straightforward task, though judgment issues do sometimes arise.  (For example, if all a manager’s outperformance of the S&P 500 over the past three years comes from holding a large position in Baidu (BIDU), the Chinese internet company listed on NASDAQ, is the S&P really the right index to be using?  But that’s a story for another post.)

What I want to point out here is a quirk in the way performance calculations are done:

–in a rising market, outperformance tends to look better than it really is;

–in a falling market, outperformance tends to look worse than it really is.

The opposite is true of underperformance.

—in a rising market, underperformance tends to look worse than it really is;

–in a falling market, underperformance tends to look better than it really is.

Here’s what I mean:

Let’s take an example where the numbers are impossibly large, just to illustrate the point.

outperformance

We’ll suppose that on Day 1 of the measurement period the index is unchanged but our portfolio gains 50%.  At the end of Day 1 we’re 50 percentage points ahead of the index.

a.  rising market.  Suppose that for the rest of the year, our portfolio matches the market performance exactly and that the index doubles from Day 2 through the rest of the year.  How far ahead of the index is our portfolio for the year?

Your first instinct is probably to say “50 percentage points,” since we’ve made no further gains after Day 1  …but that’s wrong.  The actual outperformance is 100 percentage points.

If the index starts the year at 100, its ending value is 200.

If our portfolio starts the year at 100, we’re at 150 at the end of Day 1 and we double from there–meaning we’re at 300 on the final day, or 100 percentage points ahead of the market.  Whatever positive thing we did on Day 1 has been magnified by the rising market.

b.  falling market.  Let’s take the same portfolio, up 50% in a flat market on Day 1.  This time, let’s suppose our portfolio matches the index for the rest of the year, but that the index falls by 50% between Day 2 and the end.  How far ahead are we for the year?

Having seen a., you’re already going to guess that 50 percentage points is wrong.  …and 50 is wrong.  But what’s the right number?

Well, if the index starts at 100 and loses 50%, at the end of the year it’s at 50.  At the end of Day 1, we’re at 150, but we lose half that amount through yearend.  So we end up at 75, or 25 percentage points ahead of the index.

underperformance

Let’s start again with crazy numbers.  Assume Day 1 is the day from hell and we lose half our money in a flat market.  We’re 50 percentage points behind the index.

c.  rising market.  The market doubles from Day 2, going from 100 to 200 by yearend.  We match the market.  Our 50 goes to 100.  We’re 100 percentage points behind the market.

d.  falling market.  The market declines from Day 2 on, and drops from 100 to 50 by yearend.  Our 50 is cut in half to 25.  We’re 25 percentage points behind the market.

implications

There are all sorts of implications for professional investors, who tend to earn most of their compensation based on annual performance vs. an index.  You never want to get behind in a rising market, for instance.  Or, a falling market tends to compress out- and underperformance numbers closer to the index, so that’s the best time to play catch-up.

For the rest of us, the lessons are:

–don’t get too excited about the “phantom” outperformance that a rising market (2009, 2010) brings, and

–more important, a decline of 15% like the one we’ve been in will reduce your under- or outperformance by 15%.  Don’t think your stocks are suddenly doing better/worse than they are.  To see your real performance during the downturn, don’t check the year to date figures, check them from the start of the downturn until now.

NOTE:  If you’ve constructed a portfolio for a rising market, or if you were ahead year to date before the current decline began, you should expect some slippage in relative performance as the market sags.  Similarly, if your holdings are geared for a down market, you should now be seeing a pickup in relative performance.

How much relative gain or loss?  That’s another post-full.  A lot depends on the level of risk you’ve assumed and your skill in picking stocks.  But if you’ve battened down the hatches, you should be seeing at least some benefit.  If you’ve continued to keep a lot of sail let out (which is my usual position), you shouldn’t be surprised/dismayed by a modest relative loss.