Thanks Clive, for your tireless efforts to uncloak the secrets of the financial aspects of investing. I appreciate new views but I also tenaciously tend to hold on to the way I "see the things as the are" from my perspective and in doing so I have to weed out the errors that creep in. I afress one of the points you addressed:
It might help if you opt to either monitor/measure on an accumulation basis or on an income basis. One or the other alone.
Actually I can see it both ways from the perspective as the designer of Vortex: I let the investor make up his own mind. . .I am not concerned what I want to do but I need to make sure that the features of Vortex are such that the investor can do it either way but I must provide the correct mechanism so he do the one or the other. Up to mow this was possible but the issue of dividends and the Adjusted Price was a curve ball for me.
Keep in mind that by now the structure of Vortex AIM is specifically adapted for time-based Cash Injections or Withdrawals at any time. Investors do this anyway so I have made that a feature. All the cash In-Out is simply accounted for 1) as the Reserve and 2) as time-weighted average Cash Inlay for the purpose of the simple ROI similar as is used in Standard AIM. The Start Capital (Equity + Reserve) is no longer a good base for yield calculation because the total investment is no longer a constant but fluctuates in +/- steps, just like the Equity does. For this reason I calculate the Time Averaged Capital= TAC. This time-averaged Capital is the basis of the ROTAC Yield calculation: Return Om Time Average Capital. The Portfolio Value = (Reserve + Equity), just like in Standard AIM in which the total capital put int the Portfolio is regarded as the Investment.
Equity Value is simply based on the actual share value. Price adjusted for dividend is ignored in this. I do not see how it would be relevant!
Summary
Profit =( PV – Capital Inlay)
Time weighted Investment = TAC. . . using the IRR Formula
ROTAC Yield = Profit/TAC
If a dividend is received the investor decides what to do:
1 He can leave it in his regular household account and just spend the income. As you remarked this is then accounted for separately;
2 He can enter it into the Portfolio and this increases the Reserve but it also increases the total invested capital in the same way as any other cash injections do;
3 He can enter it as equity but if he does so he has to buy a very small number of shares and pay high trade costs, so I would advise him not to do so. He could, if he wants to do that, buy a few more share in the next regular Buy. This way he uses the accumulation method and the dividend increases the Equity Value;
4 If a dividend is issued as shares then the end effect is the same as for (3)
With these procedures the Adjusted Share price is not used. The Investor can see his profit simply by inspecting the dividend yield as the total pay-out of Dividend (Case 1) separately from his Portfolio, and for Case 2,3 and 4 the yield is part of the ROTAC calculation. I see no need to do more.
The other option in Vortex AIM is to look only at the equity performance. What is the yield on the equity? A person with a saving account of $ 200000 that simply buys $ 10000 worth of Equity is not necessarily interested in setting up a Reserve. . .he is only interested in what his Equity is doing. Consider a person that buys a house as an investment. That is his Equity and the Buy Price is the Investment. The regular maintenance cost are time-spaced-investments. . . .If 5 years later an extension is added then the cost of that is a time-spaced-investments no different from other time-spaced costs. The house owner does not see the money in his savings account as an Investment in his house until he spends it on his house.
I see dynamic investing in Equity that is bought via the stock market in the same way as buying a house. Any investor has a choice to set aside a Buffer for future cost or unexpected damages or (un)expected opportunities. If he does he can consider that capital as part in his initial investment with the ROTAC method. If however the investor only wants to consider the Equity he can use the ROTAI Method: Return on Time Averaged Investment. With this method only the purchase value is treated as Investment and the Equity Value.
Profit =(Equity Value – Invested Capital)
Time weighted Investment = TAI. . . using the IRR Formula
ROTAI Yield= Profit/TAI
Now a dividend is paid out as a share issue . . .What should be done???
I see it this way: The number of shares goes up but the value per sgare goes down. Theoretically there is no change in value. The small change in share price is compensated by the amount of the dividend. So in this procedure nothing else ought to be done. . . .Correct????
I do not see what else needs to be done. Nothing is bought so the investment purchase value is not increased: the Equity is simply worth more. The dividend shows up in the Profit and in the ROTAI Yield.
If however the dividend is received as cash into any account then the investor has the option to buy shares for the amount of the dividend. If he does then the dividend must be processed in such a way that the equity value before and after tadding shares remains the same. . .Correct ????
So the way I think to do this is to treat the dividend as a simple equity purchase. No different than any other equity purchase but this action must be delayed to avoid high transaction costs for a small number of shares. This way the dividend value becomes extra equity to compensate for the share value reduction from the dividend issue. There is no need to use the Adjusted price. . . . Correct????
In regards to Back Testing historical process I have no mechanism, as yet, to automatically include dividend additions. Do I understand it correctly that if I use the Adjusted Prices, and ignore the dividend payments, that then the Yield Results automatically will reflect the additions of the dividend that would have been entered into the Portfolio if the Back Test Trades would have actually taken place in the past using the real prices?
If that is the case, then I know enough on this.
