During our first ten years iDayo™ averaged returns of 50% per
stock per year. To arrive at this figure we first annualized the return on each
stock sold, then averaged the returns on all the stocks sold during the ten
year period. To make this clear, lets look at the difference between an
annualized return and a compounded return.
To produce an annualized return, the amount invested in each
stock would have to be the same. In other words, all profits from the sale of a
stock are removed from the account following the sale, and the original amount
of money is invested in each subsequent stock. In this type of investing, the
profits from one sale are not compounded, or rolled into the next investment.
Very few people invest this way. Normally retirees who live from the proceeds
of their investments would use this method.
The method to determine an annualized gain is to multiply
the percentage of return per period by the number of periods in a year. The
result is the annualized return. Thus, an investment making 5% per month would
have a 60% annualized return (5% X 12 months). One making 10% per month would
return 120% on an annualized basis.
The great majority of investors do their investing on a
compounded basis. This method adds the gains from a previous stock sale or a period
of time to the original amount of money, making more money available for the
next stock purchase or period of time. So the compounded return for an
investment making 5% profits per month would be 79.5%; for an investment
returning 10% per month it would be 213.8%.
Most companies that offer investment services show only
their compounded returns. We choose to use the more conservative annualized
returns on our website. Even though we realize that few people invest this way,
there are some people who do so. All charts showing our yearly returns are
expressed in annualized terms, even though showing the compounded returns would
be more impressive. We prefer to under-promise and over-deliver.
When you look at the returns of our weekly folios and the
individual stocks they contain, be aware that they are not annualized or
compounded. These are the actual returns during the 16 week period they were
held. In order to get an idea of what your yearly return would be on such
investments, you can annualize either an individual stock, or the entire folio
in which it was posted. Using the method described above, you would multiply
the percentage return by the number of periods in a year. Since 52 weeks (one
year) divided by 16 weeks (our typical holding period) equals 3.25, you would
multiple the percentage of the 16 week period return by 3.25 to obtain the
annualized return.
For example, if a weekly group of stocks closed with a 20%
return for the sixteen weeks, you would multiply 20% by 3.25 for a 65%
annualized return. That would mean that if you made exactly that amount on
every folio, your annualized return would be 65% every year. Obviously that
will never happen, so the yearly annualized returns you see on www.iDayo.com are averages of all the
folios sold within that year. Note that there are two dates beside each
group of stocks: the date opened (or bought) and the date closed (or sold). We
follow the conventional practice of calculating our returns based on the year
in which they are sold. Therefore, stocks bought after mid-September of each
year will be sold the following year, and their returns included with that
year.
If you were to annualize one of the stocks in a folio, you
would use much the same process. If the stock gained 16% during the 16 week
holding period, you would simply multiply 16% by 3.25 for an annualized return
of 52%. The average 16 week return of all of our stock selections for the 10
year period starting in January, 1998 and ending at the end of December, 2007,
was 15.4%. This was the average return of all stocks, including winners and
losers. Multiplying this return by 3.25 gives us an average annualized return per
stock of just over 50%.
The average of the average annualized returns per year for
the 10 year period is somewhat less than 50%. But in some periods in our
history the average of the years has been somewhat greater than the
average of all the stocks. What is the reason for this discrepancy? Simply that
the number of stocks selected varies with the year.
There are actually three ways in which we could quantify the
overall return of our system: 1) The average of the returns of the weekly
folios; 2) The average of the average annualized returns for each year;
or 3) The average of the annualized returns per stock for all stocks
selected.
Averaging the weekly folio returns would be the least
accurate, since the number of stocks selected varies from week to week. In our
early days we had fewer folios with more stocks. Over the last five years we
have averaged three folios per month. We have normally had no fewer than three
and no more than five stocks per folio, with an average of four. Were we to
invest $1,000 in each folio, we would put $333 in each stock in the
folios with three stocks, and $200 in each stock when the folios
included five stocks. This results in an overweighting of some stocks
and an underweighting of others, making this a poor measure of performance.
Averaging the years would be more accurate, but only
marginally so. The problems of the overweighting of some stocks and the underweighting
of others would remain. This is due to the fact that over the years we have had
a wide variance in the number of stocks selected per year. So, if one were to
follow the system as it was designed, and put equal amounts of dollars in every
stock, in some years far more money would be invested than in others.
Therefore, some years would be unequally represented in an average of years.
By far the most accurate measure of the systems performance
is the average annualized return per stock. By calculating equal dollars
invested in each stock, and by annualizing both profits and losses, we obtain a
reliable measure of system performance. Instead of averaging 10 years or 300
plus weekly folios, we average the returns of 1600 plus stocks. Interestingly,
the average return per stock has stayed within a tighter range year after year
than has either of the other averages. This reinforces the superiority of this
measurement.
Subscribers are, of course, welcome to utilize which ever
measurement of the systems performance they feel is most appropriate. Unlike
the great majority of investment websites, we make all our data
available, so any type of research is easy to accomplish. Many first time
viewer of www.iDayo.com have emailed to
compliment us on our openness and transparency.
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