DCF Analysis continued – II: Finance Trading Times

DCF Analysis continued – II

This is part II of the article DCF Analysis continued – I. Please read the article from the first part before continuing with this one

Now, let’s be a bit more practical. All your investments can never be positive. Hence, let’s introduce some negative returns also, but ONLY in 2 of the stocks.

Start Date

01-Jan-05

Investment Period

3 years



End Date

31-Dec-07

Interest Rate

9%

Present Value of

A

B

C

D

E

F

G

Date

Stock

Buy

Sold

Annualized time

PV-Buy

PV-Sold

01-Jan-05

Microsoft

(1,000.00)


-

(1,000.00)

-

03-Mar-05

GS

(200.00)


0.17

(197.14)

-

01-Dec-05

Google

(4,000.00)


0.92

(3,696.68)

-

10-Feb-06

Microsoft


800.00

1.11

-

727.05

11-Jul-06

Exxon

(5,000.00)


1.52

(4,384.89)

-

13-Sep-06

Amazon

(2,000.00)


1.70

(1,727.65)

-

19-Sep-06

AMX

(3,000.00)


1.72

(2,587.81)

-

28-Dec-06

GS


600.00

1.99

-

505.49

05-Jan-07

AMX


3,600.00

2.01

-

3,027.19

09-Jun-07

Google

(5,000.00)


2.44

(4,053.34)

-

10-Oct-07

Google


6,000.00

2.77

-

4,724.79

11-Oct-07

Exxon


5,500.00

2.78

-

4,330.03

31-Dec-07

Amazon


2,100.00

3.00

-

1,621.97








Total


(20,200.00)

18,600.00


(17,647.52)

14,936.51

Net (Sold-Buy)



(1,600.00)



(2,711.01)

Net % Return



-7.92%



-15.36%

Annualized % Return


-2.71%



-5.41%

As you can observe, the two stocks Microsoft and Google are now having negative returns -EVERYTHING else is exactly the same. For Microsoft and Google as well, the returns are negative to the same extent – only the sign is changed from positive to negative (as can be seen from the table below):


Buy

Sell

% Profit

Microsoft

-1000

800

-20.00%

GS

-200

600

200.00%

Google

-9000

6000

-33.33%

Exxon

-5000

5500

10.00%

AMX

-3000

3600

20.00%

Amazon

-2000

2100

5.00%

TOTAL

-20200

18600

-7.92%

Hence, in conclusion:

When the returns are negative even with one or two stocks, the overall profit percentage goes down. We see that the annualized DCF profit percentage has come down to -5.41%. This means that your highly diversified portfolio has performed worse than the risk free bank accounts. If the bank account offered 9% return, your diversified portfolio has offered you only (9% - 5.41% = 3.59% only). If such is the case, then you are better off investing in bank accounts and savings accounts, instead of creating a diversified portfolio of stocks.

Continue to Part III

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