HenryWirth.com Beating the Market since June 2001 The Audit A detailed portfolio report is e-mailed to our subscribers every week. This report is essentially an audit of all the stocks that are e-mailed to our subscribers. The report keeps us honest by making it impossible to lie about the returns that we report, AND it provides our subscribers with a record to which they can refer. In spite of our honesty, there are sometimes ENORMOUS differences between the returns we report and between returns that some subscribers experience. Normally sixty stocks are recommended every quarter. If all the recommended stocks were purchased then the reported returns and the returns experienced by subscribers would probably correlate reasonably well. However, many subscribers do not buy all the recommended stocks. So the question is: If fewer than the recommended number of stocks are purchased then what return could you reasonably expect? The answer is that it depends on the number of stocks you buy and it depends on how lucky or smart you are. I examined all the stocks that were sold during the quarter ending September 30, 2005. Normally sixty are sold, but this quarter was unusual because only fifty-two were sold. The best performing stock gained 262% and the worst performing stock lost 28%. Not too many people buy only one stock, but believe it or not, some people do. Those who bought the winner tend to think Doug and I should be sitting at the top of a mountain; those who bought the loser tend to think we should be sent somewhere else. But what about the typical subscriber who bought a significant number of stocks? Are five or ten enough to get an average return? If not, then how many would you have to buy to get an average return? I programmed my faithful computer to generate one thousand random samples of groups of one thru fifty stocks to find the answer to that question. I mentioned earlier that the best performing stock gained 262% and the worst performing stock lost 28%. There is a very small chance of getting either the winner or the loser, but what return could you reasonably expect if you bought five stocks? If you only bought five stocks, you could reasonably expect to gain between 5% and 46%. The chance of realizing either result is equal. BUY 5 25.5% AVERAGE 3 Month Return for ALL Stocks Sold during the Third Quarter of 2005 BUY 5 46% MAX GAIN versus 5% MIN GAIN The MAX limit above was determined by adding one standard deviation to the average and the MIN limit above was found by subtracting one standard deviation from the average. That means that MOST of the time the limits will NOT be exceeded, but about 30% of the time these limits will be exceeded. Note that the 25.5%, average THREE-MONTH return, is for stocks that were sold during the third quarter of this year. That’s equivalent to an ANNUALIZED yield of almost 150%, but the third quarter was an unusually good quarter. The average THREE-MONTH return of all stocks that were sold since we started after June 2001 thru September 2005 was 10.9%. Sometimes we do better than that and sometimes we do worse than that. If you bought twenty stocks you can see that the return variability is considerably reduced, but it is still significant. BUY 20 25.5% AVERAGE 3 Month Return for ALL Stocks Sold during the Third Quarter of 2005 BUY 20 34% MAX GAIN versus 17% MIN GAIN The MAX limit above was determined by adding one standard deviation to the average and the MIN limit above was found by subtracting one standard deviation from the average. That means that MOST of the time the limits will NOT be exceeded, but about 30% of the time these limits will be exceeded. The chart below shows the variability about the mean. It was compiled from several years of data. You can see that buying fewer than twenty stocks exposes you to a large variability range. If you buy more than twenty then the variability range is significantly reduced. Return to Home Page