Swing Trader | Small Caps | Data Scientist | Not financial advice 🇦🇲 Use Code 'LOGIC' for 10% off👇🏼
Oct 14 • 11 tweets • 3 min read
I'm going to do a quick thread on what I am seeing in terms of late cycle stock behavior. I give you a reference chart here with $MGNI in 2021 going 10X in 5mo, before collapsing -90% over the next 2 years. Mind you, this is a good business with real revenues.
I use the Modified Dietz method for calculating performance. It is known as one of the most accurate methods since it accounts for timing of cash flows. See more commentary below.
This just takes into account my individual stock portfolio (excludes cash and 401K).
Not great. Why the discrepancy between annual and since inception returns?
Long term results using this method are heavily influenced by: 1) account size during period of performance. If I had my full account size from the start, my total return would be +66% (1.66*1.31*0.5*1.53 - 1), not beating $SPY but much better. This is why this method of calculating performance beyond an annual basis is heavily skewed in favor of the benchmark (which tracks performance as if it had its full value on day 1). Not to mention day 1 of this strategy is 3/13/2020, the Covid bottom, which was extremely opportune for all stocks. 2) timing and magnitude of withdrawals and deposits. Because I rely on my personal portfolio for life expenses, my performance is affected by timing of withdrawals and deposits. But that's life.
Of course the big down year in 2022 crushed my portfolio (just as my account was growing). Fortunately, as I'm still young, the lessons I've learned in the last ~4 years are going to help me compound more effectively for decades to come. I feel well positioned going into 2024.
Disclaimer: I spent the evening confirming every transaction, beginning account balances, and ending account balances for each period across all my personal accounts since inception of my stock picking (3/13/2020). I used my performance calculator which I will link in the replies. I did my best to be as accurate as I could be.
My 2020-2022 my performance using the Modified Dietz method vs time weighted returns was pretty close. But for 2023, the timing of my cash flows must have been quite lucky (since a lot of timing is just dependent on when I can deposit vs when I need to withdraw). My Dietz method performance (+53%) was +25% over my time weighted returns of +28%.
10 lessons I learned over the last three years in this market:
1) positioning is important to consider. Late investors get crushed. Example: Your thesis could be right, but shorting something down 80% is dangerous especially if short interest is high. Timing is key for shorts.
2) acknowledge when valuations are priced for perfection/high & whether this is peak earnings (unusually strong growth recently, unlikely to continue). If late bull market, consider stock could actually be much more expensive than peak earnings are leading on.
