I was just looking over the latest Bivio Club Index holdings
and I noticed that the unit value of the Club Index is
around $6.50 (11/28/09). Given that the default unit value
for clubs at inception is $10, does this mean that the Club
Index is down 35% since inception in 2001, including
dividends? That doesn't seem right.

If I am interpreting this correctly, then what is the
implication for the average Investment Club on bivio?

On 11/28/09, Drasko Kovrlija wrote:
> Given that the default unit value for clubs at inception is $10,
> does this mean that the Club Index is down 35% since inception in
> 2001,

There has been a lot of talk about Unit Value as a means of measuring
performance. It does not work for ordinary investment clubs.

That being said The Club Index is a special case club. It had exactly
one capital contribution (member payment) of $10K on 12/31/2000. The
total assets of the club are now $6.5K. Therefore, you can safely
look at the Unit Value for *this* club, and use it as a performance
measure. You are therefore correct that the Club Index is down 35% in
absolute terms since 2001.

As always, you should use the Performance Benchmark to help with your
analysis:

http://www.bivio.com/club_index/accounting/reports/benchmark

As you see, the Club Index has an AIRR of -4.7% over the last 9 years.
VFINX (which includes dividends and operating expenses) has an AIRR of
0% over the same period. It's pretty safe to say that VFINX would
have been a better investment than the Club Index.

> including dividends?

The Club Index does not include dividends. However, it also does not
count commissions on trades. Since it rebalances every month, it
would have quickly given all its money to its virtual broker if
commissions had been charged.

When you design an index, you have to make decisions like this. As
long as you keep them constant, it's a fair index.

> If I am interpreting this correctly, then what is the
> implication for the average Investment Club on bivio?

That's a good question. The Club Index is one measure of clubs. It's
an objective measure. We don't sit there and fiddle the mix like the
S&P 500 or the DOW. There's no self-selection bias other than
clubs/funds which use bivio are in the sample. Given that we have
thousands of investment clubs, it's a reasonable sampling of
investment clubs.

Another interesting measure is the average portfolio size. In March
2001, the average portfolio as remembered (thankfully) by the Internet
Archive's Wayback Machine was $27K:

http://web.archive.org/web/20010301180850/http://www.bivio.com/

The current portfolio size is $60K. That could imply two things:
bivio has grown and/or investment clubs have grown. While the former
is true, the latter is probable. Did clubs grow due to an increase
in their portfolios or through regular capital contributions?
Probably a bit of both, but the net effect is a good thing. It's
important for people to see that if they put money away, they will
have more of it over time. Save on that latte today, and buy a second
home in warmer climes when you are 65.

Also, it's important to understand what the Club Index is. The best
source is here:

http://www.bivio.com/hm/club-index.html

It is not simply an aggregate of portfolios. Rather it's a measure of
the "interest" (weight) of a stock in numbers of clubs. The more
clubs that hold a stock, the more interest there is in the stock.
Every club counts for a vote of one. That's democracy for you, or as
pundits like to say "The Wisdom of Crowds" or in popular jargon
"crowdsourcing". (Once upon a time, it was "mob psychology, but I
won't go there. ;-)

Now on to my opinions about what this means. :)

What we know about investment clubs is that they are afraid to sell.
This is true of a lot of individual investors, too. It's probably
safe to say that individual investors suffered similar losses over the
last 9 years. That's just a guess, and it would be great if
investment companies published some analyses of their data, esp. for
retirement funds. Oh wait, that might make it look bad to invest with
them. :) Never mind.

bivio is one of the best measures of individual investor performance
out there. We get contacted every now and then by people who figure
this out, and want to include the Club Index, and the Performance
Benchmark in particular, in their articles and books. You can't run a
Performance Benchmark at TD Ameritrade, Vanguard, or Schwab afaik.
It wouldn't be a good thing for their business for you to see that your
portfolio didn't do so well against, say, BRK-B. (Noticing a theme
here? ;)

Just like the Performance Benchmark, you need to compare the Club
Index to something else that's equivalently objective. That's going
to be hard to find, and even if you do, the cash flow matters. I'm going
to ignore the cash flow in the following analysis.

Consider The Fool's CAPS (caps.fool.com). I haven't looked at CAPS in
a while. It's a lot fancier! Yet, let's go to the "Hall Of Fame
Pitches". In particular, this pitch from 5/26/2006:

http://caps.fool.com/Pitch/JNJ/23754/with-3-significantly-large-pha.aspx

The last line is "JNJ has it going." Apparently, they meant "going
nowhere". The stock price on 5/26/2006 was $60. It closed at $63
on Friday (11/27/09). The dividend yield is 3%. You would have been
better off putting your money in a 3 year CD, much better off, because
CD yields in 2006 were about 5.5% for a 3 year CD. And, if you
happened to need the money last May (three years later), JNJ was at
$55 on 5/26/09. You would have lost money, not made money if you
followed TMFOpie's advice to the letter.

I would like to note that the "Start Price" for JNJ is wrong on the Fool.
They list it at $55.63. I checked a couple of sources, and all had
the price around $60. Where did they get the $55.63 from? And how
does it affect the results? Inquiring minds would like to know.

TMFOpie is the author of JNJ CAPS "pitch". Take a look at TMFOpie's
page o' picks:

http://caps.fool.com/player/tmfopie.aspx

What you see here is a list of stocks, start prices, time frames, and
one "measurement". As I just noted, they have the wrong price for
JNJ on 5/26/06 so the GIGO rule applies. Assuming they got some of
the other prices right, let's consider what they chose for a performance
measure. Firstly, the absolute stock gain is quite worthless,
because it doesn't take into account accumulated dividends. For
example, you can add $6 to JNJ's closing price today to get the value
of those dividends over the last three years. If you do this, you get
an absolute return of 19% (using the incorrect price of $56) instead
of the 13% listed on this page for JNJ.

The Score they show is the subtraction of the S&P's gain in
percent vs. the pick's gain over the whole period. For example, JNJ
went up by 13% according to the Fool and the S&P went down by -9%.
TMFOpie's score is 22% for that pick. This is a good example of no
information. If you can't add, you probably don't want to be looking
at numbers anyway. It would be too confusing.

There is no other measure of performance. What's worse is they add up
the scores of all TMFOpie's picks to produce TMFOpie's total score.
Talk about apples and oranges. The scores are computed over different
time frames. You can't compare absolute returns over different time
periods. They should be annualized (at least). Oh wait, then the
scores would be much lower, wouldn't they? Never mind.

Now let's take a look at CROX. This was the only "underperform" pick
in TMFOpie's list. It had a time frame of one year made on 9/20/2006.
This means that TMFOpie expected the stock to drop. Today, TMFOpie
was absolutely right, but you can't hold a short position for 3 years
(or you could, but you would be crazy so instead you would have sold a
naked call on a LEAP ;-). Anyway, he said it was underperform in the
next year, not the next three years. The stock closed at $30 on
9/20/2006. On 9/20/2007 it closed at $57. You would be out A LOT of
money if you had sold naked calls, and most likely, you would have
been subject to a margin call. Instead, CROX did tank, but well after
the original time horizon specified by TMFOpie.

If the Fool were honest, it would publish this figure, that is, you
would have lost 100% (not 50%, because it was an underperform pick)
on the 1 year horizon. There's no need to keep on changing the score
after the pick expired. In Las Vegas, I don't get to say the next spin
will land on red, and then say, oh wait, the next spin after that
spin. It doesn't work that way. When you forecast, you pick a time
horizon, and if it doesn't rain tomorrow and you said it would, you
were wrong, plain and simple.

So there you have it. The Club Index tells you *something*, because
it is an objective measure over a large sample of apples. You can
dice and slice the Club Index any way you want with bivio's usual
accounting tools. I would say that the S&P 500, DOW, and other
indexes tell you something as well. They are all objective, because
they publish prices. They don't have a time horizon, except in the
past.

The difference with the other indexes is that they attempt to "measure
the market". The Club Index attempts to measure what individual
investors think. It's complicated by the fact that clubs are an
aggregation of individual investors thoughts. My guess is that it is
a pretty reasonable measure nonetheless. I think it's safe to say
that individual investors lost a lot of money from 2001 to today.

If you did better, hats off to you!

Cheers,
Rob

Rob:

Thanks for an amazingly thorough and thoughtful answer. I
think you are right in that the Club Index is probably one
of the few publicly available indexes that approximate
really well how the "average" small investor has fared since
2001.

As such, I think it could also add to the current debate
whether "buy-and-hold" is a valid investment philosophy. As
we all know, it has worked really well in the 20th century,
but it has not worked at all in the first decade of this
one. WSJ reported recently that bonds have outperformed
stocks over the last 20 years, this too I believe runs
contrary to what financial advisors and press have been
telling us for a long time.

Nobody knows what the future holds, of course, but I would
personally advise all investment clubs to put a lot more
emphasis on risk management of their portfolios (e.g. having
strict rules about taking losses and harvesting profits)
instead of just buying, holding, and praying.

Regards and best of luck to all,
Drasko Kovrlija