our club has been talking about the value of each unit owned
...we are a club that has now operated for 1 yr ...I have
started using the Bivio accounting and find it fantastic
!!!!.........could you tell me (other than the ease of
calculating ) why $10.00 per unit is better than each unit =
to $1.00...i.e we each put in 25.00 per month which would
=25 units.....thanks for your input in advance ....Pat

Pat,

The value of $10 is an arbitrary starting point. We adopted
the value used by the NAIC. Over time, the value of a unit
changes. Starting with $1 would be as fine as starting
with $1000.

Some people ask why we don't let a club set the starting
value. Indeed this would be a "neat" feature. However, we
have found there is much confusion about the meaning of a
unit value. It is not a measure of performance, just as the
net asset value (NAV) of a mutual fund is not a valid
performance indicator.

Rob

Why isn't NAV a good measurement of a club's performance,
and what measurement would be good???




Robert Nagler wrote:
> Pat,
>
> The value of $10 is an arbitrary starting point. We adopted
> the value used by the NAIC. Over time, the value of a unit
> changes. Starting with $1 would be as fine as starting
> with $1000.
>
> Some people ask why we don't let a club set the starting
> value. Indeed this would be a "neat" feature. However, we
> have found there is much confusion about the meaning of a
> unit value. It is not a measure of performance, just as the
> net asset value (NAV) of a mutual fund is not a valid
> performance indicator.
>
> Rob

> Why isn't NAV a good measurement of a club's performance,

The following is from an internal post by JerryDressel:

>> It is easy to prove that unit value by itself is not accurate. Take a example of a club member who invests a $100 in a club on 1/1/00 at a unit value of $10. Then on 2/1/00 that same member invests another $100 at a unit value of $20. Therefore, this member bought 10 + 5 = 15 units for a total of $200. Then on 3/1/00 the unit value is $12. Since 1/1/00, when the club began, the unit value has increased from $10 to $12. During that same period this member invested $200. Unfortunately, even though the unit value has gone up 20% in the first 2 months, this member lost $20. <<

I'm sure there are other examples. I'm not an expert, so I
won't attempt them. :-)

> and what measurement would be good???

You want to be able to compare apples and apples. This is
why bivio's Annualized Internal Rate of Return (AIRR)
produces an accurrate accounting of cash flows for any
member, investment, or for the whole club on an annualized
basis. This means you could compare your return with that
of any bank account.

I read that the SEC is requiring mutual funds to include
after-tax returns in the performance reports. I think clubs
need to consider this as well. If your club sells a stock,
you have a taxable gain (loss) even though you do not
actually receive income. This results in you paying the
government some money, which should be interpreted as a
"loss". So, if your club has a short-term trading strategy
you will be penalized more a club which has a long term
trading strategy.

Unfortunately there are few "perfect" performance measures.
The real problem is that you really want to take into
account risk and reward. It may that your club had
fantastic returns, because the only stock you invested in
was Amazon.com. This was (and proved to be) a high risk
proposition. You were subject to large swings in portfolio
value.

Professional traders always use several measures of
performance when comparing trading strategies. They want to
know things like "maximum drawndown" (maximum loss of the
strategy during a period), longest drawndown (how long did
you stay in the loss), and ratio of profitable to
unprofitable trades. There are various measures (such as
the Sharpe ratio) for taking into account risk vs reward,
but none is perfect.

Sorry for the long winded answer. In my experience the
answer is even more complicated, so consider yourself
spared. :-)

Rob Nagler

Rob --

Based on your example NAV is a good barometer for club
performance. However, as your example dictates, NAV cannot
be used to measure an investor's performance when he/she
makes multiple investments in the club.

This is very similar to a mutual fund. You may read in the
prospectus that for the year 2000 a fund returned 24%,
however there may not be a single investor that entered the
fund on 1/1/2000 and did not contribute another dime.
Therefore probably 99% of all investor's in the fund will
have a return that varies from the 24%.

While NAV cannot determine individual returns very well, it
does give a good measurement of how the club's investments
are doing over a period of time.

Chris

Robert Nagler wrote:
> > Why isn't NAV a good measurement of a club's performance,
>
> The following is from an internal post by JerryDressel:
>
> >> It is easy to prove that unit value by itself is not accurate. Take a example of a club member who invests a $100 in a club on 1/1/00 at a unit value of $10. Then on 2/1/00 that same member invests another $100 at a unit value of $20. Therefore, this member bought 10 + 5 = 15 units for a total of $200. Then on 3/1/00 the unit value is $12. Since 1/1/00, when the club began, the unit value has increased from $10 to $12. During that same period this member invested $200. Unfortunately, even though the unit value has gone up 20% in the first 2 months, this member lost $20. <<
>
> I'm sure there are other examples. I'm not an expert, so I
> won't attempt them. :-)
>
> > and what measurement would be good???
>
> You want to be able to compare apples and apples. This is
> why bivio's Annualized Internal Rate of Return (AIRR)
> produces an accurrate accounting of cash flows for any
> member, investment, or for the whole club on an annualized
> basis. This means you could compare your return with that
> of any bank account.
>
> I read that the SEC is requiring mutual funds to include
> after-tax returns in the performance reports. I think clubs
> need to consider this as well. If your club sells a stock,
> you have a taxable gain (loss) even though you do not
> actually receive income. This results in you paying the
> government some money, which should be interpreted as a
> "loss". So, if your club has a short-term trading strategy
> you will be penalized more a club which has a long term
> trading strategy.
>
> Unfortunately there are few "perfect" performance measures.
> The real problem is that you really want to take into
> account risk and reward. It may that your club had
> fantastic returns, because the only stock you invested in
> was Amazon.com. This was (and proved to be) a high risk
> proposition. You were subject to large swings in portfolio
> value.
>
> Professional traders always use several measures of
> performance when comparing trading strategies. They want to
> know things like "maximum drawndown" (maximum loss of the
> strategy during a period), longest drawndown (how long did
> you stay in the loss), and ratio of profitable to
> unprofitable trades. There are various measures (such as
> the Sharpe ratio) for taking into account risk vs reward,
> but none is perfect.
>
> Sorry for the long winded answer. In my experience the
> answer is even more complicated, so consider yourself
> spared. :-)
>
> Rob Nagler