No. of Recommendations: 2
I merely posted this information because I am obsessed with the mathematics side of this game.

Because I respect the above statement I reply in turn with an 'academic' critique.

Now lets say you had put that same $25,000 into a medium term investment quality grade corporate bond with a 5.5% coupon like Boeing or Walmart etc., paid face value for the bond and reinvested the interest annually.

Is it plausible to buy these at face value when in 2000 there was a huge "flight to safety" movement going on? I know there were opportunities when non-correlated assets correlated during the panic, a brief window like the one we recently went through. It assumes a fair amount, that folks would have both the wits and the skills to take advantage of the moment.

I just ran a performance illustration on Microsoft stock. If you would have put $25,000 into their stock early 2000, for the last eleven years or so your annual rate of return comes to barely 1%. This includes a stock split in 2003 plus their divis since 2003 reinvested in MSFT stock.

If one chose a different tech stock, say AMZN, the head to head results change. AMZN roughly returned 4.86% over the same period, not dramatically different then the assumed bond result.

The point is once we get into head to head, individual issue v individual issue it is very hard to create an apples to apples comparison. There are far too many arbitrary and/or unseen and unintentional biases to control for.

A better case study may be IBM debt v IBM equity or similar company that had both debt and equity circulating during the same period. It is a far more apples to apples debt v. equity comparison. Better still would be to pull together a dozen or so of these comparisons. Our other choice would be to pick a sample of 100 stocks and a sample of 100 bonds and work out the returns of both baskets while managing the samples for bias. The hard part is getting historical quotes for the bonds.

just kicking the tires

Bottom line is every stock and/or whatever asset type/class position is unique to that specific point in time. You can not necessarily always be looking in the rear view mirror.

Is an excellent point.

Print the post  


What was Your Dumbest Investment?
Share it with us -- and learn from others' stories of flubs.
When Life Gives You Lemons
We all have had hardships and made poor decisions. The important thing is how we respond and grow. Read the story of a Fool who started from nothing, and looks to gain everything.
Contact Us
Contact Customer Service and other Fool departments here.
Work for Fools?
Winner of the Washingtonian great places to work, and Glassdoor #1 Company to Work For 2015! Have access to all of TMF's online and email products for FREE, and be paid for your contributions to TMF! Click the link and start your Fool career.