Tag: t_ECR

expon compound return

fake ECR due to end-stage shoot-up

Posted on by tiger40490

Compound return fallacy is the bigger framework

Criteria for ECR is as stringent as dynamic binding/dispatch 🙂

  • For 20+ years, every annual return must exceed the riskfree rate by 100 bps [2]
  • investor can top up but not withdrawal

From now on, I will mostly look at equities, esp. U.S. equities.

— the shoot-up .. When the annual returns are up-n-down, in hindsight we can still see a “fake exponential” curve due to one shoot-up period towards the end [1] of the holding period.

The growth curve is actually non-exponential, but at a coarse granularity, it looks exponential.

In reality, many investors miss that shoot-up phase. Their portfolio will be hopelessly non-exponential.

— [2] average annual return .. Compound return fallacy has more details.

Many analyses compute an average annual return from positive and negative annual figures. Then they plug this average into compound return formula — a blatant abuse of math. If you use the raw returns (not the average) to plot a curve it will NOT look exponential. — [1] Q: what if the shoot-up happened before the end of an observation window having up-n-down, i.e. the end phase is not shoot-up?
A: I believe the curve will NOT look exponential.

— effect of observation frequency
rEstate valuation changes quarterly, not daily. I only monitor my property NAV once a year at most.  Therefore, I don’t see up-n-down. If you have only 10 yearly observations in a time series, is it exponential?

how to capture true ECR

Posted on by tiger40490

Compound return fallacy is the bigger framework.

— Q: How can a small investor like me “capture” some genuine exponential compound return? This is my personal observation

Time deposit is easy, but the return is never more than 2% in my entire life. Consider CPF-SA/RA . I think CPF calculator shows how  $1 at age 55 grows at 4% compound to become $1.48. In contrast, without compounding, 4% growth over 10Y would become $1.40.

At 4% compound rate, 1.48 vs 1.4 over 10Y — CR is not that impressive. Yet 4% is the highest safe compound return I know — nothing higher than that.

This 4% compound return is earned at a cost — limited liquidity.

— Q: where exactly did I capture compound return?

  • mufu: safe funds .. I did capture about 2% compound return, but at that rate, the “miracle” of compound return was /swamped/ by NAV fluctuations.
  • rental property? impossible to capture
  • CPF: I did capture 4%-5% in SA 🙂

DRIP to build snowball@@ #w1r2

Posted on by tiger40490

Compound return fallacy is the bigger framework.

— stock DRIP… There is widespread brainwash about the miracle snowball of ECP (exponential compound return) via DRIP

  • AA) For example, with XOM (or SPY), my uncle re-invests dividends every quarter. If my aunt chooses to receive dividends but do not invest further, then yes she would get no “snowball”.
  • BB) In contrast, I choose to receive dividends, but later at my own timing[1] invest the same [2] amount into XOM or unrelated stocks [3].
  • BB^AA prognosis ….. if I invest at least the same [2] aggregate amount as my uncle, and at least once a year[1], I won’t lose out to my uncle.

[1] My frequency is sometimes higher sometimes lower than quarterly. I always prefer to time my entry. About half the times, the DRIP default timing is not ideal. If my timing decisions turn out to be inferior to the default, I won’t blame anyone, but this won’t be a valid explanation for the “snowball” or the absence thereof.

[2] The amount I invest is often bigger than my uncle’s tiny dividends. High dividend years are over, so those “snowball” stories are outdated because nowadays the smaller dividends make the snowball growth slower.

[3] Usually, my “reinvestment” amount goes into a stock different from the original stock (XOM in this example), often a stock outside SP500. This diversification is usually beneficial, though it breaks the compound return paradigm. In fact it can beat the compound return snowball.

My uncle’s robot uses market orders, which are inferior to my limit orders.

One advantage of automated (robotic) DRIP is tcost. (Tcost is a different concern in recreational investing.) In view of that, I may need to reduce trading frequency..

— splurge .. Somehow the brainwash theory assumes that most investors who opt for cash dividend would spend the payout. Suppose the typical investor Cody spends $5000/M on average. When $770 dividend received in June, how much would Cody spend in that month? The brainwash theory assumes answer is $5770, because the dividend would feel like a windfall to be spent.

Well, I think the answer for some people is $5000. They save the windfall.

Actually, some investors simply leave the dividend payout in the brokerage account to buy more stocks. If they withdraw the cash dividend, then indeed there is higher chance of spending it.

[22] j4 buy@every correction/crash

Posted on by tiger40490

Warning: [[irrational exuberance]] gave lots of data against this /tactic/ — Invest at every correction or crash, invest in bigger amounts than you have recently done in normal times. If decline continues, then decide whether to buy-n-Forget or invest more.

ETF quickGrab: buy-low +! due diligence is a more concrete plan.

— J4: ECR compound return .. widely accepted, even on non-U.S. markets [1].
This perception basically assumes that after every decline, perhaps after a few years [1] of zigzag, market would eventually transition to a “fast_window”, where annual return stays above average for months or years.

Some traders focus on the shorter horizon and target to capture a few months of fast_window. In contrasts, authors (big influence on me), financial advisors, financial planners, bank staff … focus on a longer horizon of a few years to a decade. But regardless of horizon, all of them agree on one thing — the fast_window.

— J4: DCA robot.. See my blogpost on DCA
j4: DRIP robot is related

DCA and DRIP assume that even after a market /rally/, it’s not unwise, not risky, to let the robot continue investing _small_ amounts.

— [1] Warning: this analysis only applies to U.S. equities. Non-U.S. markets can experience a long trough before (hopefully) entering a fast_window.

compound return snowball fallacy

Posted on by tiger40490

Q: How many percent of the average investor can achieve, say, 5-15% (average 10%) compound return every year over 20Y, like a snowball?
A: I would say one in 1000. Risk-free compound return rate is assumed to be 2%, so 10% is not easy and not common. More realistic is 4% compound return. Looking at the 4% CPF calc, I think the noticeable effect  of compounding requires consistent high return and a holding window of 20+ years. Most people don’t have a lot of money to put aside for so long. Therefore, I think compound return is overrated.

From now on, my focus will be mostly equities.

Most textbooks say that it’s a standard and useful (but few say “safe”) assumption to assume an investment has an average annual
return of x% (say 5% per year) and therefore we can expect to get exponential compound return if we hold it a few decades. http://www.forbes.com/sites/greggfisher/2013/03/11/savings-start-early/ and many articles quote famous people saying compound return is such a great, under-appreciated secret.

In recent years I have looked at hundreds of equity (or balanced) portfolio performance charts. Most of them are “with dividend reinvested“. All of them are supposed to exhibit ECR [exp compound return]. Now I can safely say that with equity mutual funds (perhaps due to annual fee), the Compound Return is a joke, a lie, a misleading math model and unrealistic theory.

Mathematically, if you write down the annual returns of any security, you get a series of numbers you can average. Ok 2%. So on average $1 becomes 1.02, and then becomes 1.02*1.02…. yes compounded, but that’s a mathematical procedure on paper. ECR would show an exponential growth, (slightly) curving up. In reality, I see very few such curves. For most equity funds, most often i see a flat trend i.e. up and down but no up-trend. Yes some funds show an up-trend, but nothing exponential.

I think the problem with the mathematical procedure is, taking the average return and using it to plot an exponential growth path is completely off the actual path. The 2 paths don’t match at all. The exponential path is, in my opinion, unrelated to the real path and doesn’t represent anything meaningful about the investment.

(I should include a graphical example.)

The conventional wisdom says “start investing in your 20’s to capture compounded returns“. Some investors are able to stick to a fund with $20k and see the NAV growing long term, despite short term fluctuations. Consider my GS 401k. I don’t notice any compound return.

The equity funds I have stuck to for 1 to 3 years appear directionless. Never seen anything doubling. (The bond funds slowly grow, but not showing compound return.) Therefore my real experience seems to indicate rather few sectors can give compounded growth.

DJIA (and SP500) is a poster child example. Does it show compound return in the last 20 years after the last regime change (the tech boom)? I don’t see any.

Fundamentally, listed equity prices are driven largely by herd sentiment etc, rather than corporate profit (or potential thereof). Therefore a price can surge too fast then crash. Such a path will never be exponential and therefore always surprise those who expect to see ECR.

In conclusion, if we hope to buy and hold and get Compound return of, say 5% per year, we are likely disappointed when we want to cash out. Our total return seems to depend on timing and not on the exponential formula.

— a young company’s stock price can show exponential growth, maybe for the first 5-10 years(?)

In fact, many young stocks endure a bump rise or long troughs, but over-compensated by a subsequent shoot-up phase. Therefore, the curve still looks exponential. This is explained in fake exponential due to end-stage shoot-up.

When market cap grows to 10b, it can’t grow exponentially. I think it has to do with the nature of market growth for a given product. I think few new products have its market growing exponentially more than 10Y

— Regime change in stock markets — As to the S&P growth curve in the Forbes article, exponential growth is visible in the first 20 years. After that, i don’t see any. Similarly, in most stock index charts, you could see some exponential growth in early history, but nothing exponential in the last 20 years (2000-2020).

Except young stocks, I feel ECR is now dead at a global level, including the U.S.

However, in 2050 when we look back, we may still see a fake exponential growth in 2000-2021 , iFF there is a shoot-up observation towards the end. This is explained in fake exponential due to end-stage shoot-up.