Empire Avenue ROI calculations and the Theory behind them

There are some serious players on Empire Avenue who have come up with ROI calculations to give them all the answers for who they should buy. In managing my own portfolio, I was attempted to give weight to specific factors while trying to figure out the best way to rank tickers I should buy so that I can get the most out of my eaves.

Caution: Math Ahead! This is a little math lesson of some of the calculations I have looked at and what I was thinking when making them. I would love to hear your thoughts!

I will use a couple example tickers to illustrate how these formulas would rank these tickers:

Ticker – price – divs – shares owned

A – 33.31 – 0.69 – 33.31 – 200

B – 39.1 – 0.51 – 0

C – 104.38 – 1.39 – 0

D – 164.01 – 1.72 – 247

E – 39.00 – 0.75 – 199

Legend:

DIVS- the currently displayed number representing the average weekly divs being paid out

PRICE -The currently displayed price for this ticker

MAX_SHARES – The maximum number of shares you can own in a ticker (between 200 and 500)

SHARES_OWNED – The current number of share you own in a ticker

1.05 – This is used to add in the cost of commissions. Typically, this is redundant since most purchases have commissions.

Importance: Daily Divs

100 * (DIVS / PRICE)

or

100 * (DIVS / (PRICE * 1.05))

Originally, I took the easy route and just looked at avg div versus share price. This is as simple as it gets, to give a rough prediction of what will happen to your eaves once you purchase this Ticker. No magic here at all. The reason I multiply by 100 is simply so the resulting number is easier to read.

The second formula takes commissions into account. This can be done on any calculation where price is considered and does not change the ranking of the results, so I will not include commission calculations in the following sections.

Based on this, you would buy the above tickers in this order

A – 2.07
E – 1.97
C – 1.33
B – 1.30
D – 1.05

Results:

A is the winner here, because when you look at the div ratio as a whole number (multiply by 100) and then subtract the share price, these two numbers are the furthest apart from each other. This is appropriate because this is a ratio of numbers, so the further these numbers are apart the better the ratio.

Importance: Cost to be maxed out in shares when compared to divs

aka: How many shares remaining multiplied by cost, compared to divs.

100 * (MAX_SHARES * DIVS) / (PRICE * (MAX_SHARES – SHARES_OWNED))

This calculation is different from the original because it takes into account the number of total shares that could be bought (MAX_SHARES), the number of shares currently owned ($shares), and the commissions charged by EAv upon purchase. You can read this like so:

Take the maximum number of shares that you can own multiplied by the current div price and divide that by the current price times the commission times the number of shares remaining to be bought until maximum shares is reached.

This calculation is intended to give a calculation of total available ROI once remaining shares are bought, which takes upon itself the philosophy that buying up to the max is most important only seconded by the number of divs received per share.

Based on this, you would buy the above tickers in this order

E – 394.74
D – 69.91
A – 8.29
C – 1.33
B – 1.30

Results:

E wins here because it has the highest shares owned so the barrier to maxing out is extremely low. Without E though, D would win because of the number of shares owned and the high divs. Also, take notice that C & B are exactly the same as the formula in the previous section because there are no shares owned which essentially makes this formula and the previous one exactly the same.

Importance: divs weighted versus share price

100 * ((DIVS * MAX_SHARES) / (PRICE * (MAX_SHARES)) + DIVS

or

100 * ((DIVS * MAX_SHARES) / (PRICE * (MAX_SHARES – SHARES_OWNED))) + DIVS

This formula is very similar to the one above excepting that it adds an extra bit of weight to the daily div averages by adding them to the total. This will allow the people who have higher average divs to rank higher than people who have lower divs. Which actually takes away from the importance of share price in the calculation.

Based on the first formula:

D – 173.05
C – 140.33
E – 76.97
A – 71.07
B – 52.30

Based on the second formula (taking shares owned into account):

E – 469.74
D – 173.05
C – 140.33
A – 77.29
B – 52.30

Results:

D wins the first time because it has the highest number of divs, but on the second calculation the numbers of shares owned in E trumps D significantly. This is interesting because it shows exactly what this whole blog post is getting at pretty deftly, which is that you have to choose what it is important to you. A little change in the formula, like calculation of remaining shares can seriously screw up your rankings.

Importance: Days till break even on share purchase

((PRICE * MAX_SHARES) / (DIVS * MAX_SHARES))

or

((PRICE * (MAX_SHARES – SHARES_OWNED)) / (DIVS * MAX_SHARES))

This formula simply inverts the original formula, to calculate the number of days at this current dividend rate it would take for you to break even on the purchase. The caveat here is that you can’t assume the share price goes up and divs don’t change. I threw this in, because out of all the talk that I have seen on Empire Avenue I have never seen anyone talk about “days to break even” about a ticker. I have only seen this with regards to luxury items.

assumes you only care about the break even on remaining shares until you max out.

Based on the first formula:

A – 48.28
E – 50.67
C – 75.09
B – 76.67
D – 95.35

Based on the second formula (taking shares owned into account):

E – 0.25
D – 1.43
A – 12.07
C – 75.09
B – 56.67

Results:

This is a really interesting ranking formula because it brings back the exact same results as when only divs and price are concerned (first section), showing that the lower the share price and the further the distance between divs and price, the faster you will make your money back on divs alone.

The second formula is a little bit silly, because you would almost never ignore the previous purchase that you have made on this ticker. Despite that, the ranking is exactly the same ranking as we have in the second section, where we take shares remaining into account. Kind of interesting (although not really because the ratios are exactly the same, just flipped on their heads).

Conclusion

There are a bunch of ways you can calculate ROI, some are so closely related that you will see clusters that are very similar (or exactly the same). However, if you were to give equal weight to each of the ranking algorithms above, whereby you assign a point value for each position (position 1 = 1 point) you could simply play a game of golf with these tickers (lowest score wins) then you would be forced to buy your tickers in this order:

E – 10 [2 1 3 1 2 1]
A – 16 [1 3 4 4 1 3]
D – 17 [5 2 1 2 5 2]
C – 19 [3 4 2 3 3 4]
B – 28 [4 5 5 5 4 5]

 

There are other calculations that are being used for ROI. If I have missed one here, please tell me and I will add it in!




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  • http://twitter.com/terrinakamura Terri Nakamura

    Fascinating. Thanks to Louis Frayser for pointing out this post

  • http://www.HenryStradford.com/ Henry Stradford

    Cheers.