How I measure performance

Just to make it clear so no one has to look back in all my posts, here's how my comparisons to benchmarks work:

1. Individual tranches - I compare the individual purchase dates (5 stocks every two months held for a year) to the return for VFINX (Vanguard S&P 500 Index Fund) including reinvested dividends. I recognize that a Russell 2000 fund might be more accurate, but one, I started with the VFINX and don't feel like recalculating and two, it's not that far off. Basically, I'm trying to see how the tranche is doing against a common measure. I used the fund rather than the actual S&P 500 because I wasn't originally sure that the S&P 500 index includes reinvested dividends, which I have since learned it does. Again, since it was already set up, I haven't changed it. So, in my last post, the gain on the 9/06 tranche (purchased approximately 9/7/06) is more than double the gain on a comparable investment in VFINX. I will be "closing" that tranche next week. If I choose to keep a security, I will still treat it for purposes of my analysis as if "sold" and will include it in the new tranche as if "purchased" on that date.

2. Cumulative tranches - I take a weighted average of the individual tranche gains, both open AND closed and compare it to the weighted average VFINX return. As a result, the maximum period is one year. I don't annualize the open tranches because due to the volatility of MFI stocks, I think it's misleading to annualize returns, either gain or loss. Typically these stocks "spike" up or down at certain events (press announcements, earnings releases, etc) and these can happen at any time during the year. Essentially, this figure is somewhat of a comparison of annual return to VFINX. It is never more than annual.

3. MFI Fund gain since inception (or any other date) - I am also tracking my investments as if it is a fund and am comparing its performance to the S&P 500, as many other funds do (again, with the understanding that it is a slightly imperfect benchmark to be using). When I personally invest more money in these stocks, I treat it as though more shares have been issued in the fund. I picked an arbitrary number of starting shares and have been moving forward as if all gains and dividends are reinvested. So, when I say gain since inception (3/6/06), I am starting from my arbitrary starting share price and comparing it to the current date, much like anyone would evaluate the share price performance of a mutual fund. I also chart the "MFI Fund's" performance against the S&P 500 performance. It lagged for about 9 months, crossed the S&P gain since inception, skyrocketed through July, then came down to earth (I'd attach it, but it's not on the computer I'm currently typing on). For the last few weeks, it has been trading places with the S&P 500 for which is in the lead since inception.

4. Weighted gain - This is my REAL return since inception. Based on real dollars I've invested vs. a comparable investment in the S&P 500. Because a lot of my original investment in this methodology was while I lagged the index, even though I'm now equal since inception, I'm actually well ahead. Since I have been doing this for more than a year (a year and half now) this return is MORE than a year's return. I do not quote it on an average annual basis. This is pure return since inception, on a weighted basis.

If this is still unclear, I'll add some charts soon to make it clearer. I'd be interested if anyone thinks there's a flaw in these methods or if there's a better way to track it (aside from tracking against the Russell 2000...I really don't want to spend the time re-doing my analyses and it just hasn't been that much different from the S&P 500). Maybe I'll fix it if I ever have some free time. Ha!!

-A