nanoguy’s Activity

Tue Jan 3


Watercooler Post

nanoguy wrote 2:53 PM

Internal Rate of Return (IRR) ... again! I really get amused sometimes when I see the way some analysts develop a following by touting their picks as XXX percent gain. Without all the detail, that is like me claiming 100% gain by betting on red at the roulette wheel. Who knows how many times I made a bet that lost 100%. For some of us, a much more meaningful number is one that relates to how much money we invest and how long it is invested. In fact, if we need a cash flow back from the investment (many retirees are in this group), then discounted cash flow analysis (DCF) gives us a way to standardize and compare alternatives. For example, suppose stock X has a dividend of 4% and stock Y has a dividend of 3.9%. If each is bought on Jan 1st and sold on Dec 31st, which is the better investment? Well, at least one factor would be how often dividends are paid, and another factor would be how those dividends could be used. A 4% dividend paid annually might be worth a lot less to me than a 3.9% dividend paid in 4 quarterly increments. The reason I say "might" is because it partly depends upon whether I can use the interim funds to enough advantage that I gain more than that 0.1 percent dividend difference. IRR can take the flow of funds into account. It is a discounted cash flow (DCF) method, but allows me to look backward as well as forward and develop a single number to use in the comparison, and therefore helps me to evaluate my portfolio performance for the year on a normalized basis even though I may have held several different stocks.

Fri Dec 9


Watercooler Post

nanoguy wrote 12:24 PM

There is so much talk about risk evaluation, but it is like photography ... everybody thinks they know what it is, but very few are good at it. As many in business have found out, the problem with single value risk is that it is made up of both a probability and a consequence component ... each of which changes over time. One type of evaluation which seems to make more sense to me is a breakdown into its two components combined with a "risk profile" of expected risk values over time. This profile is keyed to events which can be answered as yes or no as time moves forward, and which affect the downstream profile from that point. Thus, in my current situation I am risk tolerant. But a major adverse financial event could quickly move me in the "risk averse" direction. Maybe that type of assessment should be done when considering a stock purchase or sale?

Wed Dec 7


Watercooler Post

nanoguy wrote 12:29 PM

We see a lot of gain/loss percentages in financial blogs and news, but there is one which seems to me to make more sense when there is cash or securities going into or coming out of an IRA or 401k, and that is the "internal rate of return". Maybe that is because it is not as easy to calculate by hand. But in these days of spreadsheets, I would think this way of measuring value would get a lot more discussion.

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