Here at The Motley Fool, we believe that winners tend to keep winning, which leads naturally to the idea that you may want to add more shares to your rising stock positions. Elsewhere, there are folks who think you should double down on your losers, on the theory that those shares have become better bargains. But taking either approach means you'll sometimes be buying shares of a company at multiple different prices. Whatever your investing strategy, though, one thing is vital: You need to keep an honest and accurate score of how each of your investments is doing -- which gets a lot more difficult.
In this mailbag segment from the Rule Breaker Investing podcast, host and Motley Fool co-founder David Gardner invites Frank Thomas, The Motley Fool's director of investing intelligence, to answer a couple of listeners' questions, and talk about the tools and techniques everyday retail investors can use to simplify the task of tracking their returns.
To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. A full transcript follows the video.
This video was recorded on April 24, 2019.
David Gardner: Rule Breaker mailbag item No. 6. I want to welcome Frank Thomas, director of investing intelligence here -- or, Frank, as you say sometimes, just head math guy.
Frank Thomas: That works, too!
Gardner: [laughs] Welcome!
Thomas: Thanks for having me, David!
Gardner: A lot of questions this month coming from people who are keeping up with their own returns and calculating how they're doing. We have a particular problem that I think sometimes we create here at Rule Breaker Investing for members and listeners. That is that they'll buy a stock, which is good, and then that stock might go up. And then they might buy more of it because we say, add to your winners. That's our style. That creates a wonderful problem. People start looking at that, and they think, how do I account for that? What tool do I use to keep up with that? That's a little bit of the theme here, why I wanted to have you in, Frank.
Two questions. Let's start with a short one. This is from Anthony, whose screen name is BallroomBlitz. Anthony writes, "Hi, David. Great time listening and walking my dog Fusko as I dogpod." [laughs]. All right. Anthony goes on, "When you reference your percentage gains vs. the market, do you include subsequent purchases?" Frank, how do you think about that? How do we account for that here at the Fool?
Thomas: Personally with my own portfolio, I track it in two different ways. First, I track individual lots or investments each time I buy a stock, so I can parse out the performance of different purchases. I can track if I'm I buying at the right valuation, or what have you.
Gardner: Right. For example, if you buy a stock at $40, you put it in right there, you mark the market against it, the S&P 500. Then, if you add to it at $67, on a separate line, maybe in a spreadsheet, or maybe a tool, I don't know if you have one you'll tell us about, you then have a separate one where you're also showing where the market was then, and you can see them both.
Thomas: Exactly. I track them side by side to parse out that detail that he was talking about specifically. And then also, I'll track the overall position using, the technical phrase is "cash in, cash out money-weighted return." You're literally tracking each individual purchase as a cash flow. A cash out would be investing in the market, each individual transaction, and then you get the overall output, the overall cash out at the end, which is the current price. Using both those perspective captures all the detail you could possibly need.
Gardner: Frank, are you doing this typically now? You are, of course, our director of investing intelligence. You probably have tools and resources here at The Fool. I sure hope you do, because we're a for profit company. Whereas, hey, I'm just an armchair investor, and that's really me, David Gardner. What do you, Frank Thomas, the fellow armchair investor, use? Do you use a spreadsheet? What tools do you use to track?
Thomas: I use Excel just like everybody else. Over my 10 years of investing, my portfolio tracker has become, at many times, much more complex, and then more recently, far more simplified, as my time has gotten more precious to me.
But spreadsheets are the simplest and best way to do it. Excel is obviously the go-to. Google Docs and Google Sheets has actually gotten a lot better. One thing that might be useful to a lot of retail investors is that you can now import stock data automatically from Google Finance --
Gardner: Into your Google Docs spreadsheet.
Thomas: Into your Google Docs spreadsheet, using Google Finance function.
Gardner: That's awesome! Thanks, Frank! Let's keep this as Rule Breaker mailbag item No. 6. Richard Marin also wrote in, kind of a similar story. He said, "Dear David, having been a Motley Fool member since 1998, subscribing to Hidden Gems, Rule Breakers, Stock Advisor for 13 years or so," he also has a question about tracking returns. "In the world of a stock picker, positions are added to, new stocks are selected, on occasion stocks are sold on random dates during the course of a calendar year. Calculating the overall performance of a portfolio against the broader index can be difficult, especially where weights in different positions vary significantly." Richard gives a little bit more about him. Then, Frank, I'd love to hear your perspective. He says, "For example, I execute a relatively modest number of trades during the course of a calendar year, between six and 10. But, I invest different values to new and existing positions, and I'm trying to diversify and balance my portfolio." He'd like some advice on a tool. Frank, am I hearing, it's Excel once again? Or is there anything else? Let's say somebody has a little bit more resources. Is there a higher-powered overall portfolio tracking tool that exists out there?
Thomas: There are, but the market tends to be bifurcated between things like Excel, and at the very, very, very high end --
Gardner: What hedge funds use.
Thomas: Basically, yeah. At the Fool here, we use a tool called Advent APX, which is what we use to power --
Thomas: Advent APX, by the company Advent. That's a really institutional-grade product. Which, if you're a really, really, really, really passionate individual investor and also --
Gardner: [laughs] A hedge fund?
Thomas: -- a hedge fund, it might make sense for you. But I think Excel is probably the best tool for most people. In terms of the problem that he's talking about specifically, if you're just interested in tracking the overall performance of your portfolio, and you don't need as much granularity for individual positions, and you just want to wipe away the complexity, the best way to do it is going back to the basic kind of cash in cash out overall money weighted return. Instead of tracking individual transactions and all the dividends and everything like that, you just track how much you deposit into your account over time, then have the overall current market value of your portfolio at the end, and using Excel's wonderful XIIR function will get an overall return.
Gardner: That sounds pretty useful and pretty simple for most of us. I definitely use Excel some, but I'm by no means somebody who's excellent at Excel. But I think, Frank, you know much more about this stuff than I do. But both you and I as individual investors, who aren't buying Advent APX for ourselves, can use that method and see how we're doing. It causes you not to worry too much about individual cost bases or where you added because you're just looking at the cash in and cash out, as you mentioned.
Gardner: Thank you, Frank, for your perspective! Before you go, tell me a little bit about your work here. Fool IQ is a phrase that somebody like Richard, who's been a member for years, might recognize. But a lot of people haven't necessarily heard about Fool IQ. I want you to show off a little bit what you're working on here at The Fool, Frank.
Thomas: Fool IQ, the platform itself is an internal analyst research tracking platform. All of the analysts in our newsletters maintain Fool IQ portfolios, which are these hypothetical model portfolios of all the stocks they like and want to follow, that are weighted based on how much conviction they have in a given company. For instance, they look just like average portfolios, but they're hypothetical. They're used to power things like a lot of the screeners we have on The Fool's website. We use this to track the performance of our analysts' research that are in many ways away from the newsletters themselves.
Gardner: Right. You might be an analyst here at The Fool, and I may have picked a stock that you don't even agree with last month, potentially. You have your own ideas. So a fantasy portfolio -- while it may sound fantasy, it's very real, you're being tracked directly for your performance. In some ways, what we have done with Motley Fool Caps over the years, internally, that's what's happening here for every one of our analysts and investors.
Thomas: Exactly, exactly. We use that for helping develop their careers over time.
Gardner: That's wonderful! I think it also helps power our Motley Fool index, The Fool 100 Index.
Thomas: Yes. The Fool 100 Index is a combination of the top 150 highest conviction companies pulled out of Fool IQ and all of our newsletter recommendations from Stock Advisor and Rule Breakers.
Gardner: Frank, are you having fun doing the work you're doing here at The Fool?
Thomas: I have fun every single day!
Gardner: I sure hope you do! Thank you for joining us on Rule Breaker Investing!
Thomas: Thank you, David!