Workshop Portfolio

Foolish Workshop
Costs of Screens,
Part 2:

How to lose money with a 42% annual return

By Moe Chernick (moebruin)

EL SEGUNDO, CA (Oct. 14, 1999) -- For a while now people such as TMF Elan have been warning investors not to invest in monthly trading strategies without having significant start-up cash. In my last article, I showed you the equation I use to switch reported strategy results to real life results. As a review here are those formulas:

Actual Return = (Strategy Increase - Costs) * (1 - Tax Rate)
Where Tax Rate = Marginal Federal Tax Rate + Marginal Local Tax Rate

When we looked at the costs we saw that they are fairly small when you are trading once a year, but they can add up significantly when you are following a strategy that calls for monthly trades.

To illustrate how these costs add up, let's first look at the spread cost for monthly strategies. Tuesday, I gave some guidelines that are useful for quick comparisons between various returns, but today we will ignore those and look at actual spreads.

To do that, follow along as I select stocks and collect prices in real time for this week's RS-26 stocks. Here are the Bid and Ask prices that a typical investor would have seen for those stocks last Friday morning as soon as the data for the list was available.

```Stock           Bid           Ask       Spread
QCOM         208 3/4      208 13/16      0.03%
TTN           14 9/16      14 11/16      0.86%
PMCS          89 5/8       89 11/16      0.07%
SYMC          36 1/4       36 1/2        0.69%

```
Are these typical spreads for these screens? That is open for debate but they are the actual ones when it counted. An elephant like Qualcomm tends to lower the spread. If lower-priced stocks are selected, the spread would could easily double. On the other hand, with all higher priced stocks, the spread could end up under 0.10%.

Now let's put the whole picture together using the RS-26 month screen. For this example, I will assume that the investors are using a discount broker that charges \$10.00 a trade. The RS-26 (1-4) monthly strategy has a CAGR of 42.0%, which is equivalent to a monthly increase of 2.97%.

So let's start by looking at the \$2000.00 investor. We will consider that this is his first year's contribution to a Roth IRA so taxes aren't in the picture. To get into the screen he pays \$40.00 in commissions to buy the first 4 stocks. That leaves \$1960 for the stocks. (Actually, he won't be able to put all of his \$1960 into stocks because the prices never add up to exactly how much you have to spend. In effect, a small amount of cash that could theoretically be invested is left "on the table" each month further eroding your gains, but we will ignore that problem for now.)

As shown below the cost for the first month is \$44.02 and the return is \$58.21:

Round Trip Trading Costs: 2*\$20.00 = \$40.00
Spread: \$1960/2 * .0041 = \$4.02 [\$1960/2 because only half of the portfolio was sold]
Cost: \$40.00 + \$4.02 = \$44.02

Return: \$1960*0.0297 (2.97%) = 58.21

Thus the Actual Return in a tax-free account is = \$58.21 - (\$40.00+\$4.02) = \$14.19
Monthly Return = 14.19/1960= 0.72%

So the investor starts the second month with \$1974.19. The RS-26 Monthly strategy averages 28 trades per year. Repeat the above procedure every month for a year, throwing in a third trade every quarter to bring you up to the 28 trades per year average, and you end up with a portfolio worth \$2066.66. Even in a tax-free account, you lost to most money market funds and probably to some interest-paying checking accounts.

Start the program with \$10,000 and things change. Start with \$20,000 and they start to look much better. But start out small, and you'll stunt your growth with a monthly strategy.

Next week we will compare after-cost returns for various screens at various levels of investment so that you can judge for yourself where you best fit.

Until then, Fool On!

New Rankings | Workshop Returns

Workshop Portfolio

9/28/01 as of ~5:30:00 PM EDT

 Ticker Company PriceChange Daily Price % Change Price AET AETNA INC NEW 0.94 3.36% 28.94 BA BOEING CO (1.04) (3.02%) 33.36 CAT CATERPILLAR INC 1.11 2.53% 44.91 COG CABOT OIL & GAS 'A' 0.69 3.59% 19.90 DD DU PONT (EI) DE NEMOURS 0.99 2.74% 37.14 DGX QUEST DIAGNOSTICS (0.45) (0.73%) 61.42 EK EASTMAN KODAK 0.42 1.31% 32.49 GM GENERAL MOTORS 1.39 3.38% 42.55 LH LABORATORY CORP AMER HLDG(NEW) 1.14 1.42% 81.21 MO PHILIP MORRIS COS (0.76) (1.55%) 48.24 NEWP NEWPORT CORP 0.26 1.90% 13.97 NVR NVR INC (0.54) (0.38%) 140.41 PKX POHANG IRON & STEEL ADS 1.09 7.51% 15.61 PVN PROVIDIAN FINANCIAL 1.07 5.64% 20.04 QCOM QUALCOMM INC (0.40) (0.84%) 47.16 RJR RJ REYNOLDS TOBACCO HLDGS (0.69) (1.19%) 57.31 SLE SARA LEE CORP Unchg. Unchg. 21.09 UNFI UNITED NATURAL FOODS 0.56 3.18% 18.15 WMI WASTE MANAGEMENT (0.01) (0.04%) 26.74

Overall Return -- total % Gained (Lost)
 Day Week Month YearTo Date Since Inception (12/24/1998) Workshop 1.30% 7.32% (12.02%) (20.66%) (18.91%) Comparable S&P 500 n/a n/a n/a n/a (19.07%) S&P 500 (DA) 1.95% 7.48% (8.33%) (21.22%) (14.88%) NASDAQ 2.02% 4.71% (17.46%) (39.68%) (31.41%) DJIA (DA) 1.68% 7.07% (11.07%) (17.86%) (2.22%)

Internal Rate of Return -- Annualized Rate of % Gained (Lost)
 Since Inception (12/24/1998) Workshop (17.62%) vs. S&P 500 (17.63%)

 Trade Date # Shares Ticker Cost/Share Price Total % Ret 1/8/01 26 MO 40.94 48.24 17.82% 1/8/01 22 RJR 50.10 57.31 14.39% 1/8/01 67 UNFI 16.45 18.15 10.34% 12/24/98 24 CAT 43.08 44.91 4.24% 1/8/01 8 NVR 136.63 140.41 2.77% 1/8/01 40 WMI 27.44 26.74 (2.54%) 1/8/01 50 SLE 22.54 21.09 (6.42%) 1/8/01 61 PKX 17.83 15.61 (12.46%) 1/8/01 15 DD 48.83 37.14 (23.95%) 1/8/01 29 AET 38.17 28.94 (24.19%) 1/8/01 39 COG 28.75 19.90 (30.79%) 1/8/01 14 QCOM 75.54 47.16 (37.57%) 1/8/01 8 LH 134.69 81.21 (39.70%) 12/27/99 18 GM 73.26 42.55 (41.92%) 1/8/01 18 BA 59.53 33.36 (43.96%) 1/8/01 9 DGX 114.49 61.42 (46.35%) 12/27/99 20 EK 65.09 32.49 (50.08%) 1/8/01 20 PVN 55.50 20.04 (63.89%) 1/8/01 15 NEWP 74.96 13.97 (81.36%)

Trade Date # Shares Ticker Total Cost Current Value Total Gain
1/8/0126MO\$1,064.50\$1,254.24\$189.74
1/8/0122RJR\$1,102.25\$1,260.82\$158.57
1/8/0167UNFI\$1,102.12\$1,216.05\$113.93
12/24/9824CAT\$1,034.00\$1,077.84\$43.84
1/8/018NVR\$1,093.00\$1,123.28\$30.28
1/8/0140WMI\$1,097.50\$1,069.60(\$27.90)
1/8/0150SLE\$1,126.88\$1,054.50(\$72.38)
1/8/0161PKX\$1,087.75\$952.21(\$135.54)
1/8/0115DD\$732.50\$557.10(\$175.40)
1/8/0129AET\$1,107.00\$839.26(\$267.74)
1/8/0139COG\$1,121.37\$776.10(\$345.28)
1/8/0114QCOM\$1,057.62\$660.24(\$397.39)
1/8/018LH\$1,077.50\$649.68(\$427.82)
1/8/0118BA\$1,071.50\$600.48(\$471.02)
1/8/019DGX\$1,030.44\$552.78(\$477.66)
12/27/9918GM\$1,318.62\$765.90(\$552.73)
12/27/9920EK\$1,301.75\$649.80(\$651.95)
1/8/0120PVN\$1,110.00\$400.80(\$709.20)
1/8/0115NEWP\$1,124.37\$209.55(\$914.83)

 Cash: Total: \$10.80\$15,681.03

 Key • S&P 500 (DA) = dividend adjusted. Dividends have been added to the total return of the index. • DJIA (DA) = dividend adjusted. Dividends have been added to the total return of the DJIA. Note Note: The Workshop Portfolio was launched on December 24, 1998, with \$4,000 which was invested in the Foolish Four strategy. Approximately \$15,000 was added on January 8, 2001, to support five additional mechanical strategies. At that time approximately \$1000 was transfered out of the Foolish Four strategy to bring the Foolish Four into balance with the other strategies. (That's why the Foolish Four's overall return is not consistent with stock values.) Such rebalancing will take place each year among the strategies so that each will start out with approximately the same value at the begining of the year. No more cash additions are planned. The first four tables above show the overall performance of the portfolio. Below that we also track the performance of each component strategy. All transactions are announced publicly before being made, and returns are compared daily to the S&P 500 and the Dow. (Dividends are included in the yearly, historic and annualized returns.) Stocks are chosen using strategies developed by the Workshop community.