Foolish Workshop
By
Workshop Returns
Behind the Numbers
BURLINGTON, VT (Sept. 16, 1999) -- It's that time of year when the returns from some of the strategies we follow here in the Foolish Workshop begin to look awfully heady. A common inquiry from new Fools, after they see such juicy returns, is "Hey, I didn't just fall off a turnip truck, Fool. Tell me how you came up with those too-good-to-be-true numbers!"
Excellent question. The monthly screens that get updated in the Unemotional Growth and Relative Strength-IBD reports are strictly hypothetical, as are the annual portfolios tracked on the Workshop Returns page. That means that for the returns that are published, no real stock gets bought or sold.
When we follow strategies in real time, we need a "standard," if you will, for when and how the hypothetical models get traded. The returns we report are standardized both for convenience and for ease of comparison. One such standard is the day of the week we publish the rankings.
The information for running the stock screens comes from Value Line and Investor's Business Daily (IBD). IBD, of course, publishes daily, but all of the screens that we follow start with the Value Line timeliness ranking that is made available by noon (usually) on Fridays. So Friday is the day when the rankings are the most fresh. That's why the Workshop publishes rankings every Friday afternoon. The annual returns use starting prices from the last Friday of the previous year. Our hypothetical monthly models use "last trade" prices from the first Friday of each month.
We take it for granted that it's not possible to get exactly those prices for each stock in a real-money portfolio. It is, however, a crisp, available reference point, and if someone were so inclined, real trades could be entered before the Friday close.
In real life, Fools purchase stocks for various strategies in different weeks of the month, on different days of the week, and at different times of the day. Since no one has proven, to my knowledge, that buying or selling at different times of day, week, or month cause anything but random differences in stock prices, we work under the assumption that, over the long run, this really shouldn't matter much.
Certain things will detract from the return for real-world investors: commissions, the spread between the bid and the ask price of a stock (which the stock's market maker or specialist pockets), and any taxes owed. Since these expenses vary widely from investor to investor, and even from strategy to strategy (strategies with more frequent trading schedules will generate more incidental costs), we leave it up to the informed Fool to make estimates of these costs and make adjustments to the raw returns.
It's also good to remind ourselves that these historic return numbers are not at all like a Food & Drug Administration label. Far from being certified reliable, they're only a rough prediction of the performances anyone following the strategy over a similar time period might receive, with the differences being greater for strategies traded monthly or quarterly than for annual strategies.
Have a great weekend!