Workshop Portfolio

Foolish Workshop
More on Costs
Blinded by high CAGRs

By Moe Chernick (moebruin)

El SEGUNDO, CA (Oct. 19, 1999) -- In my last two articles I have been focusing on the costs of investing in various mechanical strategies. In part 1, I talked about how to convert a strategy's backtested return which didn't consider costs into a real-world return. In part 2, we looked specifically at strategies that trade monthly. We saw that someone starting with $2000.00 could end up losing to a money market fund while following a monthly strategy that returned 42% annually before costs.

Today let's compare after-cost returns for strategies with varying initial investments and holding periods. Remember, although longer holding periods may show lower returns in our cost-free backtests, investors need to realize that those "lower" return strategies may put more money in their pockets.

The following chart shows the after-cost but before-taxes return for the RS-26 week monthly strategy and the PEG strategy in its monthly, semiannual, and annual versions. (The PEG's return is also fairly close to the Keystone and Spark screens if you are interested in their after-tax returns.) By the way, don't think you can ignore this reality just because you may soon be opening up one of those free-trade accounts at American Express. You still need to consider spread. If you have a free-trade account then just assume you are in the $1,000,000.00 category when calculating your return.

Amount Invested    RS-26 M   PEG-26 M  PEG-26 S   PEG-26 A
Cost Free Return    42.0%     44.1%     47.9%     45.8%
$2000                3.9%    -12.6%     32.7%     35.6%
$5000               24.8%     14.9%     40.5%     41.2%
$7500               29.5%     21.0%     42.2%     42.4%
$10,000             31.8%     24.1%     43.1%     43.0%
$20,000             35.3%     28.7%     44.4%     44.0%
$30,000             36.4%     30.2%     44.8%     44.3%
$50,000             37.3%     31.4%     45.2%     44.5%
$100,000            38.0%     32.4%     45.5%     44.7%
$1,000,000          38.6%     33.2%     45.7%     44.9%

M = Monthly
S = Semi-Annual
A = Annual

Assumptions:
4-Stock Portfolio's - all starting in January
$10.00 Trades
Annual and Semi screens turned over all the stocks every time
RS-26 M made 28 trades/yr. PEG Monthly had 38 trades per year
RS screen assumed a spread of 0.41%.
All PEG screens assumed a spread of 0.89% (based on actual spreads for October 1st stock selections)

As you can see, because of the frequent trading and high spreads even with a $1 million portfolio, the PEG monthly strategy loses almost 11 percentage points from its backtested average return. For the RS-26, the results aren't quite as bad because the screen has lower turnover. With a $1 million dollar portfolio, the investor's return will drop 3.35% due to costs. The returns drop steadily, though, as lower and lower portfolio values are used.

But the big question here is: What's the point of monthly trading? It never beats the semi-annual and annual screens? I don't think that this chart is the stake in the heart of monthly trading. It's possible to pay less than $10 per trade, and these are only two strategies, both of which have fairly high turnover. An investor who pays less per trade and is using a monthly screen that has lower turnover may find the costs less of a problem, but only if returns are at least as high as the average over the past 12 years.

Then again, the chart above assumes that the money is in a tax-deferred account. At the very least, it should put a stake in the heart of monthly strategies if taxes are considered and, of course, it sounds the death knell for smaller portfolios using a monthly strategy. It also should certainly be a wake up call for all investors to look very, very closely at costs as a percentage of their own portfolios especially if they trade frequently.

Remember when making any investment decision, don't let greed today make you feel foolish tomorrow.

Until next time, Fool On!

New Rankings | Workshop Returns


Workshop Portfolio


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

Ticker Company Price
Change
Daily Price
% Change
Price
AETAETNA INC NEW0.943.36%28.94
BABOEING CO(1.04)(3.02%)33.36
CATCATERPILLAR INC1.112.53%44.91
COGCABOT OIL & GAS 'A'0.693.59%19.90
DDDU PONT (EI) DE NEMOURS0.992.74%37.14
DGXQUEST DIAGNOSTICS(0.45)(0.73%)61.42
EKEASTMAN KODAK0.421.31%32.49
GMGENERAL MOTORS1.393.38%42.55
LHLABORATORY CORP AMER HLDG(NEW)1.141.42%81.21
MOPHILIP MORRIS COS(0.76)(1.55%)48.24
NEWPNEWPORT CORP0.261.90%13.97
NVRNVR INC(0.54)(0.38%)140.41
PKXPOHANG IRON & STEEL ADS1.097.51%15.61
PVNPROVIDIAN FINANCIAL1.075.64%20.04
QCOMQUALCOMM INC(0.40)(0.84%)47.16
RJRRJ REYNOLDS TOBACCO HLDGS(0.69)(1.19%)57.31
SLESARA LEE CORPUnchg.Unchg.21.09
UNFIUNITED NATURAL FOODS0.563.18%18.15
WMIWASTE MANAGEMENT(0.01)(0.04%)26.74

Overall Return -- total % Gained (Lost)
  Day Week Month Year
To Date
Since
Inception
(12/24/1998)
Workshop1.30%7.32%(12.02%)(20.66%)(18.91%)
Comparable S&P 500n/an/an/an/a(19.07%)
S&P 500 (DA)1.95%7.48%(8.33%)(21.22%)(14.88%)
NASDAQ2.02%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
1/8/0126MO40.9448.2417.82%
1/8/0122RJR50.1057.3114.39%
1/8/0167UNFI16.4518.1510.34%
12/24/9824CAT43.0844.914.24%
1/8/018NVR136.63140.412.77%
1/8/0140WMI27.4426.74(2.54%)
1/8/0150SLE22.5421.09(6.42%)
1/8/0161PKX17.8315.61(12.46%)
1/8/0115DD48.8337.14(23.95%)
1/8/0129AET38.1728.94(24.19%)
1/8/0139COG28.7519.90(30.79%)
1/8/0114QCOM75.5447.16(37.57%)
1/8/018LH134.6981.21(39.70%)
12/27/9918GM73.2642.55(41.92%)
1/8/0118BA59.5333.36(43.96%)
1/8/019DGX114.4961.42(46.35%)
12/27/9920EK65.0932.49(50.08%)
1/8/0120PVN55.5020.04(63.89%)
1/8/0115NEWP74.9613.97(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.