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URL:  http://boards.fool.com/overall-returns-explained-14980042.aspx

Subject:  Overall returns explained Date:  5/16/2001  3:35 PM
Author:  TMFTardior Number:  501 of 609

From the desk of David Gardner:

In 1994, we started this portfolio by investing $50,000 of our own money right in front of America. The premise was that we, as average people, could outperform the professionals, and the easiest way to measure the professionals was their mutual funds. So from day one onward, we have reported our numbers for the day, month, year, and history of the portfolio.

We have never added any money to the portfolio in order to keep things simple surrounding that original $50,000 round number. However, not adding money has also meant that anytime we wanted to buy a new stock, we had to sell an old one. That created (to our annoyance) a taxable event, a tax that we wouldn't have paid had we set up our portfolio more realistically to have money inflows. Most Americans aren't operating in this artificially static environment, and do have money to add each year... and therefore don't have to, and shouldn't, be paying such taxes.

OK, so now the SEC has finally made mutual funds report their returns with tax adjustment. Yay! We have been calling for that for years. So in order to continue to fulfill our original aims of stating our returns as compared to a typical mutual fund, we're also now reporting our returns after taxes. Would we have set things up differently if, back in August of 1994 when we had 60 readers and didn't expect to become a closely watched multimedia company, we'd known how things would play out? Absolutely. We would've set up our portfolio with regular money injections, instead of setting ourselves up to have to sell in order to buy (i.e. pay unnecessary taxes that we wouldn't advocate someone do in the first place).

Anyway, despite this we remain proud of our historical after-tax returns, even granting that we were never managing this portfolio to maximize after-tax returns. If we had, one result would have been that we would've made fewer stock picks... but from a teaching perspective, we're glad that we have shared more selections with you, our Foolish reader. Some people complain that we don't make enough!

Continuing our conservative accounting and reporting, we've done a funny thing this time: We have assumed that we had over $80,000 in our original account, and that $30,000 of that sat around for years dormant, completely uninvested, in order to later be used to pay taxes. This adjustment has therefore artificially lowered the true historical percentage return that our stocks have shown. You can get a more accurate picture from the internal rate of return, which takes into account that the cash was added over a period of time to pay taxes.

Perhaps now we should simulate their cash inflows ourselves. If you would like to see us begin to add cash to the portfolio for this reason or any others, let us know in a responds to this message.

Fool on.

--David Gardner

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