Date: Fri, 19 Jan 2007 13:41:00 -0600
From: joetaxpayer 
Subject: Re: Fresh College Grad
Newsgroups: misc.invest.financial-plan
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speednxs wrote:
> joetaxpayer wrote:
> 
> 
>>Speed - The math for ROI work out quite differently, The 17.65% you cite
>>is the first step. If the participant is paid weekly, the average
>>invested amount is half the money, no? So the three month return is
>>35.3%. Do this four times per year and you have an annualized 147%
>>(close to what FP2 quoted above).
> 
> 
> Well you can define oranges to be apples and orangutans to be
> Cadillacs.  It doesn't make it so.  Return is profit.  Investment is
> principle paid.  Return on Investment is profit divided by principle.
> Since contributions are made at specific times we can look at the
> profits at those specific times and calculate ROI at that very instant.
> 
> I apologize if the columns don't line up.  This is really boring, but
> you've forced me into it:
>  big snip
> There is no 147% return.  Not no how, not no way, not ever.
> 

Speed - If I offer you $11 in return for your $10 (forget risk, assume I 
am your brother) I know you will say the return is 10%, and you are 
right if this occurs in a year, lend me $10 today, I give you $11 in a 
year. If I give you the $11 in 3 months, the annualized return is 46% 
(1.1^4). This is not complicated. Whether or not we roll over the loan 
is irrelevant, ROI calculation have to take time into account.

I quickly admit the stock plan purchaser does NOT see this huge 
percentage, as he can't get that rate on the money before it goes in, 
nor after the sale, so the compounding effect is not fully seen.
For argument sake, I can borrow money a day at a time, through a home 
equity line. If you ran the numbers on a spreadsheet, you'd find that it 
makes sense to use that line to fund the stock purchase each week. The 
limit (i.e. the point where you'd not do this) is if the rate to borrow 
exceeded that 140% number. (I ignore the fact that the stock can rise so 
the gain is more than the 17% per period, or fall the day it hits the 
account, I didn't want to inject a banana into the discussion.)

Your numbers completely ignore time. My $11 for your $10 is good for a 
year, great for 3 months and super for a month. Let me know where I've 
gone wrong.
FWIW - Yahoo provides an annual rate of return function for stock 
tracking. I used it to track a portfolio I was setting up, and had to 
laugh as the next day some stocks looked as if they anualized to 1000% 
growth. Well, 2% a day can do that. I had no dream it would that way in 
a month or a year.
JOE