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.
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