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  • DVK Portfolio Comparison To SPY, Using Sharpe Ratio [View instapost]
    "The work you have done is actually quite valuable, because by comparing the 3 year Sharpe ratio that I reported, which shows about a 65% higher Sharpe ratio for the S&P benchmark, it becomes apparent that almost 100% of that improvement is due to the "active management" of DVK and not the actual investments themselves." - FinancialDave

    First of all, thank you for the complement. I appreciate it. We all learn whenever anyone puts a little effort into evaluating something and sharing the results.

    I disagree about evaluating DVK's active management however. The three year comparison simply shows the risk adjusted returns over that particular period. DVK also 'managed' the portfolio over the prior four years when it had a much better performance than SPY.

    Based on the numbers in the table above, I get the following:

    6/1/12 to 5/31/15 (Ending 3 year period)
    DVK CAGR: ____ 12.88% ______ SPY CAGR: ___ 19.53%
    DVK A_STDEV: __ 9.22% ______ SPY A_STDEV: _ 8.46%
    DVK SR: ________ 1.40 _______ SPY SR: _______ 2.31

    Yet for the prior 4 year period we get a different result:

    6/1/2008 to 5/31/2012
    DVK CAGR: _____ 4.73% ______ SPY CAGR: ____ 0.79%
    DVK A_STDEV: __ 5.55% ______ SPY A_STDEV: _ 6.24%
    DVK SR: ________ 0.25 _______ SPY SR: _______ 0.04

    During the first four years DVK's Sharpe Ratio was a factor of 6.0 better than SPY.

    During the past three years SPY's Sharpe Ratio was better by a factor of 1.65.

    So while your statement that SPY had a better Sharpe Ratio during the last three years is true, it is also true that SPY's performance was rather poor during the prior four years. Which is 'most representative'?

    Dicing up the time interval into smaller parts only reduces the statistical confidence in the result(s). Statistical theory will tell you that larger sample sizes narrow the confidence interval for any conclusion.

    In other words, the results from a seven year set of data is more likely to be closer to the 'true' value than results obtained from a three year subset of the same data. Which subset is "more true"? The first four years or the last 3?

    "... in a recent book by Lowell Miller, where he notes that some people point out that "you can't eat risk adjusted returns." Which of course is very true and one of the reasons why I like to report REAL results." - FinancialDave

    Tell that to the SPY holder at the end of December 2011 when his holdings were valued 18.25% lower than DVK's portfolio.

    DVK: $56,128.00 ___ SPY: $45,879.00

    Now certainly, you can't go backward in time to change anything, and SPY did manage to catch up during the roaring bull market that followed, but the message I believe the Sharpe Ratio is intended to convey is that DVK's portfolio is less likely to have such large drawdowns to achieve the same gains. (Fortunately the gains at the end of the data set are nearly equal, so the Sharpe Ratio differences wind up being almost entire due to variability in the returns - aka the risks taken.)

    "My interest is more in the risk/reward of the investments chosen and not in hiring DVK as my investment manager" - FinancialDave

    And most DGI'ers interest is in evaluating the methodology DVK used, not the vehicles he chose to implement that methodology.

    DGI'ers believe that buying quality dividend growing stocks AT A VALUE PRICE will boost the Sharpe Ratio. I'm still trying to figure out how a practitioner of MPT/TR figures out which ETF's are available at a 'value price' and takes advantage of that opportunity. It seems to me that they generally just pick a date and invest or rebalance regardless of valuation.

    Did you choose your three ETF's because they were undervalued at the time? Whatever method you used to select them, that is the methodology that the Sharpe Ratio is scoring, not the fund manager, and not the ETF or funds used. The method by which they were selected and acquired is what drives the performance to follow as DGI principles drive the DG stocks purchased and their performance, and as the selection criteria (and weighting) for the S&P500 index drives SPY's performance.
    Jul 16, 2015. 03:23 PM | 1 Like Like |Link to Comment
  • DVK Portfolio Comparison To SPY, Using Sharpe Ratio [View instapost]
    "Does turnover rate have any direct link to the risk-adjusted returns and the Sharpe ratio that Smarty calculated?" - DVK

    Not that I can find. The words "turn over" and "turnover" do not appear once in the Wikipedia entries for 'Modern Portfolio Theory' or 'Sharpe Ratio'.

    It would seem to me that since the Sharpe Ratio is a statistical measure of performance (it uses standard deviation) that the method for generating the results is inconsequential to the comparison. All you need are the results of the methodologies in question.

    The nice aspect of using a Sharpe Ratio is that you can compare the risk adjusted performance of day traders to that of index DRIP'ers and get a meaningful comparison. The end result for both cases is a measure of how much you gained vs. how much the portfolio value changed over time.

    The theory being that it is preferable to gain 0.5% every month (minimal variance) than it is to gain 6.17% in a year where the monthly variance is +/- 3%. Same gain, different risk profile.

    How you get the gains is of no consequence to the measure, it is more appropriately a question of personal preference. Some people would rather plop their money into ETFs, DRIP, and go to the beach, while others would prefer to make dozens of scalping trades each day by following the market in real time (with turnover in the 100's of percent each month).

    Application of the Sharpe Ratio indicates who is generating better financial "performance", but says nothing about any other aspect of the methodology. If anyone wishes to assert otherwise I'd sure appreciate a link to any webpage that makes and/or defends that particular claim as being considered inherent in the use of the Sharpe Ratio.

    That's the way I see it. Of course opinions can vary widely, and often do.
    Jul 16, 2015. 12:30 PM | 1 Like Like |Link to Comment
  • DVK Portfolio Comparison To SPY, Using Sharpe Ratio [View instapost]
    "Just remember that the DVK portfolio has had close to 65% turnover of stocks in those 7 years, (about 2-3 times the S&P 500) so I question the validity of a 7 year Sharpe ratio." - FinancialDave

    Then why did you compare 5 and10 year Sharpe Ratios when reviewing your three fund approach?

    "Below is a risk analysis between the portfolio and the benchmark. Two of the standard risk measures are the standard deviation (SD) and the Sharp ratio. The 3 year, 5 year, and 10 year SD for the Portfolio is 8.89, 12.83, and 14.54, respectively, and 9.08, 13.14, and 14.72, respectively, for the benchmark, which shows a less volatile portfolio as compared to the S&P 500 in all three time frames. The Sharp ratio is a risk-adjusted measure developed by Nobel Laureate William Sharpe. The higher the Sharp ratio the better the risk adjusted performance. As you can see below the portfolio outperforms the benchmark on a risk-adjusted basis, even if ever so slightly, in all three time periods measured."

    If a 10 year Sharpe Ratio is important enough for comparing a 40/40/20 fund approach a 7 year Sharpe Ratio should be good enough for DVK's portfolio.

    It also seems to me that if you are rebalancing your three funds annually you are likely to have a "turnover" of 66% most years.

    Why are long term Sharpe Ratios important for your funds and turnover unimportant, while at the same time the exact opposite is important for DVK's performance?

    Talk about moving the goalposts. It's almost comical.
    Jul 16, 2015. 08:22 AM | 2 Likes Like |Link to Comment
  • Surprise! Cash Invades The Dividend Growth 50 [View article]
    "I'm not sure a 12-pack can be held in an IRA!" - Mike Nadel

    Well, if you don't drink the beer you can't return the bottles for the deposit money. No deposit money, no 'financial returns'.

    Ergo, you sorta 'have to' drink the beer.

    Besides, nobody said the beer HAD to be a long term holding.
    Jul 15, 2015. 10:17 PM | 3 Likes Like |Link to Comment
  • DVK Portfolio Comparison To SPY, Using Sharpe Ratio [View instapost]
    "I've seen comments and articles related to the Sharpe ratio and never quite got the reasoning, thanks for laying it out so clearly." - Miz

    Thanks for the compliment Miz. As part of my 'debates' in some of the comments sections for Dave's prior article(s) I actually went and looked up what criteria is generally accepted as being successful for MPT.

    Wikipedia's introductory paragraph for MPT provides a definition:

    "Modern portfolio theory (MPT) is a theory of finance that attempts to maximize portfolio expected return for a given amount of portfolio risk, or equivalently minimize risk for a given level of expected return, by carefully choosing the proportions of various assets."

    DVK's DGP provided an opportunity to measure, in MPT's own terms, the relative performance of a DGI portfolio which is directed by a non-professional investor over a reasonably meaningful time frame.

    While future performance might differ, I think that the exercise shows that a considered DGI approach to investing can enable retail investors a chance to match or exceed the performance of 'the market' and by extension 'most' professionally available funds or ETFs.

    "Barras, Scaillet and Wermers tracked 2,076 actively managed U.S. domestic equity mutual funds between 1976 and 2006. They found that after fees, three-quarters of the funds exhibited zero “alpha,” a fund’s excess return over a benchmark index. And 24% of the funds were run by unskilled managers (who had negative alpha, or value subtraction).

    And — are you sitting down? Only 0.6% — you read that right, 0.6% — showed any true skill at beating the market consistently, “statistically indistinguishable from zero,” the three researchers concluded."

    I'd say DVK is nearer the 0.6% group than most. He may not be winning every year, but over time he is getting ahead of the market (SPY) on a risk adjusted basis.

    And now we have the data to prove it. ;-)
    Jul 15, 2015. 10:09 PM | 2 Likes Like |Link to Comment
  • Surprise! Cash Invades The Dividend Growth 50 [View article]
    $13.15 is enough to buy a cheap 12 pack of beer (or a better quality 6 pack).

    With all these extra and difficult financial decisions to make the staff probably deserves a 'bonus' of some sort.

    Just sayin'.
    Jul 14, 2015. 09:33 PM | 3 Likes Like |Link to Comment
  • Measuring The Success Of Your Dividend Portfolio [View article]
    "Since there is no way of knowing for sure, since I know of no existing article of what was invested in 7 years ago, I guess it really doesn't matter." - FinancialDave

    But you only need to know the DGP and SPY values on a monthly basis to calculate the Sharpe Ratio. You don't have to know the DGP components at all.

    When you estimated the Sharpe Ratio for SPY above did you account for the 94 companies which left the SPX since 6/1/2008 and were replaced by other companies? I'm thinking probably not.

    Fortunately DVK was kind enough to send me monthly DGP values to use in calculating his Sharpe Ratio.

    I did just that for the entire seven year period. I detail the results in an Instablog I just finished writing:

    I'd spoil the fun if I told you the end result here. Click through to my Instablog and see what happened. :-)
    Jul 14, 2015. 09:24 PM | 2 Likes Like |Link to Comment
  • DVK Portfolio Comparison To SPY, Using Sharpe Ratio [View instapost]
    Sorry for the odd table formatting. I couldn't figure out how to get the data to center in the columns. Thankfully we are still able to read them.
    Jul 14, 2015. 09:06 PM | Likes Like |Link to Comment
  • Measuring The Success Of Your Dividend Portfolio [View article]
    "The DVK portfolio Standard Deviation is 9.29 while the SP500 is 8.55 and the Sharp ratio is 1.26 vs 2.06 for the SP500 (larger number being a better risk adjusted return). Both of these based on a 3 year look-back from todays portfolio, which will be somewhat skewed by the fact the portfolio has changed" - FinancialDave

    Three years ago is the point where DVK's portfolio had its biggest lead over the SPY (as eyeballed on DVK's website graph). Given that they are now at the same place in TR for all 7 years it stands to reason that the SPY has outgained DVK over those 3 years and would thus have a good chance at a better Sharpe Ratio.

    I still believe that DVK's risk/reward ratio (Sharpe Ratio) is better over the entire 7 years. With a Beta of ~75% the annual volatility has to be lower than SPY's annual volatility, AND, both have nearly the exact same TR over the 7 year span, so I believe DVK's risk was lower (as measured by annual volatility over the full 7 years) to get the same TR.
    Jul 13, 2015. 10:23 PM | 4 Likes Like |Link to Comment
  • How A Public Pension Crisis Is Driving An Epic Credit Boom [View article]
    This is not the credit bubble you are looking for. Move along...
    Jul 12, 2015. 10:25 PM | Likes Like |Link to Comment
  • Looking Beyond The Obvious: Critical Thinking And Investment Decisions (Part 1) [View article]
    Facebook and others have added solar power for server farms in Prineville, Oregon. The solar power generated isn't enough to run the entire operation, generally, but it is often used for any office spaces in the buildings.

    Additionally, one of the driving reasons why these companies have added solar power is because of the savings in property taxes that are offered, the savings of which more than offset the cost of the solar farms.

    "Oregon has attracted large data centers from Apple, Google, Facebook and Amazon because the state offers property tax exemptions through its enterprise zone program, and because it has no sales tax on the pricy computers that run server farms. Those tax savings are worth tens of millions of dollars a year to a large data center, exceeding the considerable power bill these tremendous facilities generate."

    No tax break, and there's likely no solar power. It's only economic because it is subsidized through reduced taxes.
    Jul 10, 2015. 03:09 PM | 5 Likes Like |Link to Comment
  • "No near term positive catalysts" for coal stocks, analyst says [View news story]
    I should think a yield of 10.75+% with a dividend coverage ratio of 56% would be a reason to consider nibbling at ARLP. They've also been increasing the dividend steadily for the last several years. That's seems reasonably positive to me.

    Coal fired power plants aren't going to be replaced in a hurry. They'll need coal to generate power for many years to come, IMHO.
    Jul 9, 2015. 07:50 PM | 5 Likes Like |Link to Comment
  • Nothing But Sunshine For This Cloud-Based REIT [View article]
    I also learned of DLR from one of Brad's earlier articles. Picked some up at $49.32 and plan to hold with my current YOC of 6.9%.

    I add my thanks to the heap already expressed for the detailed update. It's nice to see that the business doesn't seem to need much in the way of monitoring going forward. Consistent, steady growth works for me.
    Jul 9, 2015. 12:16 PM | Likes Like |Link to Comment
  • Here's Why Altria Is A Dividend Growth Machine [View article]
    Long MO since early 2011.

    Dividend increase to $0.56 puts me over 9% Yield on Cost. Wooooo!

    Do yourself a favor and buy the dips.
    Jul 9, 2015. 10:18 AM | 1 Like Like |Link to Comment
  • Dividend Champion Portfolio July Update [View article]
    Do the values in your spreadsheet include shares bought with dividends, or are the dividends collected separately in cash and not shown on the spreadsheet?

    I would offer the following suggestions as constructive criticism:

    1) Report how much you collected in dividends each month. The "High Yield" label indicates that it is an income portfolio, right?

    2) You show the 'before' rebalancing amounts in the table above, you might show the 'after' values too so people can see what changed.

    3) Maybe add a table that shows the total portfolio value and total income for each month of the past year so folks can see how things are progressing.

    Thanks for taking the time to post your results. Your methodology seems reasonably sound for being so simple. More detailed results will help folks see how well it is performing as you go forward.

    David Van Knapp has been posting his demonstration Dividend Growth Portfolio results for the past 7 years. You can see what and how he provides the updated information at this link:
    Jul 8, 2015. 07:43 PM | 1 Like Like |Link to Comment