What My Chart Measures
I decided I better write something about the chart at the top of my blog before some prudent reader of mine points out that the completed stock trades I’ve recently begun posting near the top don’t seem to correspond to the erratic line of that chart. I’ve been fortunate enough as of the time of this post to not have had to sell a stock at a loss. I am however, holding some that are hovering below a point of desired profitability. How all this is incorporated has become gruesomely complicated.
Lots of ways to make a stock chart
Making a chart that shows gains, under normal circumstances, is actually a really easy thing to do. But normal circumstances are limited in many respects; more complicated trading strategies cannot be summarized in the same ways.
Let’s say you have $100 to invest. You buy one share of company XYZ for $100. The next day you notice that it’s trading for $105 so you can rightly say that you made 5%. Presumably, you could continue to track this everyday, graph the daily values of your share of XYZ and use this to represent your performance. This is exactly what typical charts on Yahoo! Finance and others sites represent for individual stocks as well as indices like the S & P 500 and the Dow Jones Industrial Average.
What if then, after a week, you add $100 to your brokerage account and buy a share of company ABC for $50, the day after which it goes up 10%? What if you keep adding $100 every week and some weeks you buy several shares of some companies, sell some shares of other companies, then eventually (say 20 weeks in) you add $1000, and buy $1000 worth of stock that goes up 50%? How much weight should the monstrosity at the end carry? If you had, prior to making the $500 dollar wallop at the end, only made $30, should that gain be allowed to completely skew you performance? What if that $1000 purchase at the end only went up 1%? The basic performance chart described earlier in this post doesn’t take into account anything but an initial investment and its subsequent value. If that initial value changes, at different time intervals, and gains during those later intervals are grossly variable, how can you accommodate that for a chart?
I decided to allow for these situations using the following methods. I average the amount invested. Not the amount in the brokerage account, but the average amount of equity actually held. So, if I had $100 invested for four days, then added $500 the fifth day, for the first day I would have an average of $100 invested, but for the last I would have $180.
The advantage of doing this is that if I had, from the first $100 during the first four days, gained 50%, or $50, then gained 10% on the day I added the $500 I would have gained $50 on the last day which could, were I to say that I now have $600 invested, look like I had gained 16.7%. But that doesn’t seem to reflect the success I had during the first week. I gained 50%! So by having different amounts, each with potentially different individual performances, representing them in a way that conveys meaning about real performance can get tricky. By equating the average amount invested as a daily average, and taking the total yield at that point, we could say I made $100 on $180 invested on average over those five days. Now we get 55.6% which much more accurately identifies the huge gains on the much smaller amounts made during the first few days.
But there is a temporary drawback to this as well.
A poorer opening performance could be equally misleading. If, in the first four days, I had made 1% then on the fifth, 10%, I would have gained $51, or 8.5% of $600. But that makes the first four days look surprisingly good. In truth, the bulk of that was made at the very end. By averaging however, on that fifth day, we would have a 28.3% gain which over exaggerates the gain made on the last day. But after a month, using the average, we would show a gain of 11.4% which looks much more accurate.
So, to avoid the misleading over and under exaggerations that using the total amount invested at a particular point can introduce, I decided to use a banking daily average which can (temporarily) skew things too. The good thing is that the effect is temporary, while the examples using the total invested, period, are not.
So why then, after having been fortunate to not sell a stock at a loss, does my chart dip? Because, while the market was beginning to falter, I was accumulating. The consequence of this is that I have had an ever growing amount of equity, and have not sold every stock I have bought. So the gains I make before more accumulation are forced to spread over the growing average amount I have invested. Which is exactly as it should be. I want to measure the amount I gain over the amount I have invested, and match, accurately, those gains to the amount invested. If I invest more, I should gain more. If I invest more, but make fewer dollar gains, that should be reflected. To be more specific, I have been accumulating a particular stock that I felt was such a value when I fist bought some, that I can’t stop myself from buying more.
Cheers and good hunting