Model Portfolios: Don't Be Fooled By The Numbers

Have you read many a portfolio posted in the web and in publications? If you do, you would have seen many instances where the published portfolio having incredible gains on a particular stock but somehow you have the doubts because you know very well the gains made aren't as good as proclaimed.

Here's a posting made way back on 12th April 2006: It's the calculations that counts.. !!

Here's what I wrote back then.

• Remember I mentioned that if an investor made an investment into Yi-Lai at a cost of 1050 back in 2003, the investor would have received 450.00 in dividends and I went on to calculate in the following manner.
  
  So from an investment outlay of 1050, the investor would have gotten a 450.00 in dividends or 43% back of their investment outlay. Which means that the investor current holding cost of Yi-Lai is 600.00.
  
  Currently Yi-Lai last traded at a share price of 1.30. Which means the investor is holding on to an investment gain of 117%!!!
  
  Which works to an annual compounded return of 29.4% for holding this investment for 3 years!!! ( from the posting of It's the business.. Part IV )

Does everyone realise that I am really cheating here???

LOL!!!!!

Ah... let me show why. The invested capital is 1050. The return in dividends is 450.

Current market price back in 2004 was 1.30.

Current market price + dividends received = 1300 + 450 = 1750.

Or a 'current' gain of 67%. (and not 117%!!!)

Which works out to a mere 18.56% compounded annual return for holding the stock for 3 years.. and not 29.4%.

See how I managed to glorified everything when I deducted the dividend received from my investment cost?

Ahh.... do you notice that Insider Asia write-ups... and do you notice how they ALSO deduct the dividends received from their investment cost?

The below is the snapshot of their portfolio published back in 2006...

See how they have their 5,000 shares of Yi-Lai 'purchased' in 2003 has an average cost of a mere 61.5 sen? And yeah, everyone else cost is above 1.00.

And so by doing deducting the dividends from the cost of investment, it just makes everything look so much nicer. Glorified.

Me? Dividends are just dividends, they should not be deducted from the cost of investment.

Some comments received back in 2006.

• hhc1977 said...
  nm,that's why i never trust this kind of calculation.
  
  when u bring forward the dividen u r had received, u r effectively ignoring the time value of money.
  
  Eg,Ex, i buy stock A at RM10 and it pays RM1 dividen per year.
  
  IF using inside asia cal,at year number 10, my cost will be RM0... So my return is INFINITY!!
  
  Where got infinity return one..... Where is the time value of money??
  
  IN mathematic
  
  ASSume
  
  Price Bot = P1
  Price Now = P2
  Dividen = D
  
  Normal return cal = (P2-P1+D)/P1
  
  Skewed return cal = (P2-(P1-D)/(P1-d) =(P2-P1+D)/(P1-D)
  
  See the big difference in the denominator......