August 02, 2003

Money Learning

So, I'm in this investing club. And since I'm a bit of a delver, I've been diving headlong into stock stuff. Tonight I learned about Compound Annual Growth Rates. Like if you have a 50% gain one year, and a -30% gain the next year, you can't just average them together and call it a 10% gain both years, because that's messed up.
  • $100 * 1.5 = $150 * 0.7 = $105 (actual)
  • $100 * 1.1 = $110 * 1.1 = $121 (wrong)
They don't match, as you can see. It turns out the CAGR is actually something like 2.47%
  • $100 * 1.0247 = $102.47 * 1.0247 =~ $105
So how do you get this number? One of two ways: multiply all the rates together (with 1's; 5% would be 1.05), take them to the Nth root (where N is the number of rates/years), and subtract one, OR average the NATURAL LOG of the gains (plus 1), antilog them, and subtract one. That's complicated. And that's actually a simplified version of IRR, the granddaddy of time-based performance measurements. Anyway it is actually kind of interesting learning about it all.

I'm also learning about stock screens. There are stock screens I'm learning about that have a CAGR of almost 40%, tested over fifteen years. That's insane. I want in. But, they also have Geometric Standard Deviations (where you antilog the standard deviation of the natural logs) that are a bit high. Which means nothing to you, I know. I'm just showing off because I'm a showoff. Bleah! CAGR! GSD! STDEV! Nyeah! But it basically means the risk is high since it measures volatility.

Okay good night. Go Dean.

Posted by Curt at August 2, 2003 03:29 AM