Revised Alpha

My last calculation relied on an insufficient dataset. I took weekly returns instead of monthly ones, and found my alpha to be 0.61% (which includes the risk free rate of 0.16% or whatever), and my portfolio's beta to be 1.91.

Calculating Alpha

Using 0.16% as my risk-free rate of return for March, I was able to calculate 18 months' worth of my excess returns. I found these by calculating my monthly rates of return (geometric returns for months in which I added money to my brokerage account) and then subtracting from those totals the rolling 3 month T-bill rate. I plotted the Dow Jones' excess returns against my own, and then took a linear regression to find the Security Characteristic Line. The y-intercept of that line is my portfolio's alpha. It's around 2.5%. So, 2.5% is the value of my active management. In an efficient market, the y-intercept should be at the origin, implying an alpha of zero. This is because in an efficient market, there is no value in active management. Everyone is perfectly rewarded for the amount of risk taken. Having a positive (or negative) alpha means that my portfolio is earning 2.5% in excess of what it should be, given my level of risk. I'm not sure what an industry average alpha looks like, but it should trend toward zero, if markets are efficient...

Update 03/14

I'm quite disappointed with my performance. I mean, I've done pretty well, but I don't think I'm a stock-picking guru. I'll have to look for proof of my genius elsewhere.

I've been invested for a year and a half now, and my geometric return is 20%. 6 months ago, however, I was up more than 40%. So, I think my market timing was good, not my ability to pick stocks. For comparison, the DJIA is flat since October 1, 2008. If I hadn't sold anything after my initial purchases in 2008, I'd be up 178%. I was holding a stellar portfolio of Ford Motor Company (up 662% since mid-Nov 2008), Tata Motors (up 444%), and US Steel (up 84%). I also had three duds: MGM Mirage (down 22%), Bank of America (down 29%) and Freddie Mac (down 31%). I also would have avoided paying short-term capital gains in 2009 if I had sat tight. Not my best ideas.

For the year-to-date, I'm not doing so badly. I just checked Morningstar and the best performing funds of 2010 are two Fidelity Select funds, with returns of around 18.70%. The average YTD return for the 16,384 funds that Morningstar tracks is 3.27%. I'm up 13.17%. So, I'm killing it. But, my 1 year return is 129%, and that doesn't look so impressive when compared to the top ranked fund on Morningstar.com, which has a 1 year return of 241%. Again, had I kept my original portfolio, I would have outperformed every single professionally managed mutual fund tracked by Morningstar. That would have been pretty spectacular.

Here's my assessment of my risk: MGM Mirage might go bankrupt. The company has $13 billion in debt, and while its management has reached an agreement to extend bond repayments by 2 years, Las Vegas is still down and out. Convention bookings are up, but room rates are very low. VMWare is profitable and growing, but Microsoft is going after its virtualization business. I don't understand the technology well enough to say whether Microsoft will be able to grab market share or not. I can't even read Bank of America's balance sheet. I'm just praying that it'll be able to turn its business around. Investors hate China. AgFeed just had a great year, but you wouldn't know it by looking at its stock price. It bounced 20% on Tuesday and steadily lost value over the rest of the week. I've very positive on the company, but there's going to be prolonged weakness in Chinese pork prices. Especially now that China is opening up its market to North American exports again. Profitability will be low. Verizon is my rock. I've got my 6.5% dividend, and Verizon has the cash flow to sustain it.

Verizon purchase

I finally feel like an investor and not like a speculator. I bought common shares of Verizon today, making my portfolio 17.25% Verizon, 36.7% MGM Mirage, 25% AgFeed, 15% VMWare, and less than 6% Bank of America. The Verizon investment is practical. The company is paying a 6.5% dividend and that's better than anything I can find in the money market. AT&T is going to lose its exclusive right to sell the iPhone and Verizon has the better network. I see long-term capital appreciation, and a good dividend until then. Isn't that the way you're supposed to do this?

Plus, Verizon still owes me $260.00 and I'm going to get it one way or another.

Returns to 02.12.10

I'm still holding shares of AgFeed Industries, MGM Mirage, Bank of America, and VMWare. I've moved some more cash into my brokerage account (on the chart above, every time there's a break in my returns it's because I added cash to my account) and I'm thinking about correlation. Diversified I am not.

Geometric return since 10/01/2008: 14.06%. A geometric return corrects for money withdrawn or deposited over the life of an investment. So, if you had given me $100 to invest for you back in October of 2008, it would be worth $114.06 now. If you had invested that $100 in a Dow Jones index, it would be worth $93.24. Although, as you can tell from the graph above, I haven't really made any progress since June.

VMW 4Q

I can't wait to get to work tomorrow and listen to VMWare's 4Q 2009 conference call. Up 18% in after hours trading, VMWare killed it this quarter. In the worst recession since the 1930s, revenues are up 8% YoY!

The rest of my cash

I spent my remaining cash on shares of MGM Mirage two weeks ago. I bought in at $10.99.

My fiscal year runs October 1st to September 30th, because I bought my first shares on October 1st of 2008. My first year's returns were 27.7%. It'll be tricky to calculate my returns for Q4 2009 because I added funds to my portfolio in October. I have to figure out how I want to handle the accounting for that...