Friday, November 14, 2008

Bookkeeping: Performance Metrics Over

After yesterday's technical debacle there is simply no way I can continue using as a tool for measuring our stock selections and trades. In one day alone, we effectively ruined months, or perhaps quarters of performance. I measure performance on a relative basis versus the market, the idea of course is to outperform what the market does; hopefully by large measure. Being locked out of all ETF trades yesterday (and the day before) has corrupted the performance data by a material amount.

Since we were locked out from a great portion of our portfolio the past two days and we've been emphasizing ETFs in lieu of individual stocks the past few weeks, here is what happened between 1 pm and 4 pm yesterday

A bit after 1 PM this is how we were doing

Fund +0.5%
Market -3%

(+3.5% for us)

At 4 PM due to inability to trade ETFs

Fund -5%
Market +7%

(-12% for us)

This was effectively a 15.5% swing versus the S&P500 in under 3 hours, which ruins months of work since we were locked into short ETF positions unable to sell, and unable to buy our long ETFs as we wished.

We would not of caught all of that upside move (I'm under no illusion) since we had 40% cash, and still would of held a portion of our short exposure but we should of been up at least 2-4% for the day, trailing the market by 3-5%ish at most. Using that as a yardstick we lost 10.5-12.5% versus where we should of been in those 3 hours had we been able to access our ETFs. My general (aggressive!) goal is to beat the markets by 15% annualized; so well over 2/3rds of a yearly goal went up in smoke in those hours and all our historic metrics effectively washed out as well.

Some individual examples - the short ETFs went from a range of +6% to +15% across all 7 that we hold just after 1 PM to -12% to -27% by 4 PM. This was 25% of our portfolio. I said I'd get out of 1/3rd of these short ETFs (8% of portfolio) at the low and another 20-25% (4% of portfolio) if we crossed back over S&P 875. I'd of cut more as the market gained steam as a capital preservation measure, but since I did not write it on the site yesterday I am not counting that. Instead we ate all those losses.

I wrote I would allocate 12-15% of our portfolio to Ultra Russell 2000 (TWM) [long] as the S&P broke over 840... the price at the time was mid $17s. It ended the day at $21.30s which was a 22% gain missed with a sizeable part of the portfolio.


Combined with the fact I cannot put stop losses on anything which is not representative of any serious situation in the real world, along with the inability to short individual equities - despite calling many out that have fallen 60-95%+ over the past year and a quarter - this is just the wrong tool for us. At least these two issues are structural so while hampering things, it's a known issue to try to work around. But the inability to trade positions is a whole different set of issues. We've been locked out a few other times over the past 16 months as well - this is not the first time, but this one was far more punitive to performance than other episodes.

All these items combined creates a situation where this is not a fair representation of what I would like to do in real terms - I'm not going for a long only fund where I hold positions for months on end and can't even be stopped out of falling stocks when I'm not around to watch. I don't mind having poor performance if it reflects my intentions and bad decisions, but it's become more and more non reflective over time and yesterday just took the cake. Every historical performance metric now will be off by -10% to -12% from 1 afternoon of blow up - someone who shows up to the website in 3 weeks or 3 months won't know "why" or the history; they'll just see a performance which is not reflective of my decision making anymore.

So we'll continue on from a stock selection, market action, and economic viewpoint but the tracking mechanism - which already was causing some issues - has failed, in my opinion. I'm not happy about this outcome, because it was a ton of work I put into this to create a somewhat reflective track record. Actually I'm quite steamed. The ironic part was we were beating the market by >9% this week through Wednesday and by 12.5% around 1 PM Thursday. I think that would of been the best week versus the indexes we ever had. All crumbled away in under 3 hours. We also were beating the market by large amounts in every tracking period (last 3 months, last 6 months, last 1 year, and since inception) other than the last month when we were "even" with the market. But it's moot now.

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