Limitations of the Valuation Report

Laurie Frederiksen on

The valuation report is an important report for your club to use to communicate the value of the club’s assets to everyone.

It is, however, a terrible report to look at to use for any sort of decision making about investing.

Particularly seductive to us all is the “Unrealized Gains and Losses” column. Admit it, you are drawn, as we all are, to “see how well we’re doing” by looking at which numbers are positive, especially if they’re big numbers. We “love” these stocks. We really don’t like the ones where a negative value is showing. They are telling us we’re “bad” and have made a bad decision. If anything, we want to make them go away, and we want to keep the ones that are making us feel good.

We need to realize how strong these emotional reactions might be and how we might be letting them influence our behavior. Unfortunately, they may lead us to take the wrong action. That stock which has lost money may have become even more attractive as an investment and the one that is showing us the nice positive number may have already achieved the growth it’s going to for the foreseeable future.

The problem is that the only information on the Valuation report that matters in terms of us making investing decisions is the total current value of our club assets. The only question we should be thinking about is: How can I make this number grow going forward?

That is why, when you begin your discussion about what investing actions you want to take, put away your Valuation Report. You should be looking at a report which is something like a ManifestInvesting Dashboard. This report is showing you estimates of future returns. They should guide your decision making, not snapshots of the past.

You can easily pull up a Manifest Dashboard of your club’s Portfolio using the Manifest button which you will find on the Accounting>Investments screen. You don’t have to be a subscriber to see this.

Here’s your assignment for today. First, run a performance benchmark report for your club for the past 1 year period. Use VFINX as your benchmark. What is your Relative Return? (Subtract the VFINX IRR from your club IRR)

Then, go to Accounting>Investments and click on the Manifest Button. In the bottom left, you will find your Portfolio PAR (Projected Annual Return). What is this number?

It’s easy to find all these numbers. If you’d like to share them or you’d just like to know more about how to use them, let’s talk about it more here in the coming days.

Laurie Frederiksen

www.bivio.com

Andrew W. Hinds on

We too are frustrated with the "yesterday�s snapshot" aspect
of the valuation report when making decisions on what to
sell/hold/buy more. I am exploring your suggestion for our
next club meeting, but need a small clarification. When I
run the performance benchmark report, I get an IRR of 48.0%
for our club and 35.2% for VFINX. Subtracting the VFINX IRR
from our club�s IRR, gives me 12.8%. Is it correct to assume
this is our club�s relative return?

The Manifest Investing Dashboard gives me a average PAR of
8.7% which is gratifying, but I am concerned that our
projected yield is only 1.2%. Should I be?

I think that this is a valuable report to give our members
as the basis for meeting discussions. Thanks, Laurie, for
alerting us to it.

Andy Hinds
Greyrock Club

Laurie Frederiksen wrote:
The valuation report is an important report for your club to
use to communicate the value of the club�s assets to
everyone.

It is, however, a terrible report to look at to use for any
sort of decision making about investing.

Particularly seductive to us all is the �Unrealized Gains
and Losses� column. Admit it, you are drawn, as we all
are, to �see how well we�re doing� by looking at which
numbers are positive, especially if they�re big numbers. We
�love� these stocks. We really don�t like the ones where a
negative value is showing. They are telling us we�re �bad�
and have made a bad decision. If anything, we want to make
them go away, and we want to keep the ones that are making
us feel good.

We need to realize how strong these emotional reactions
might be and how we might be letting them influence our
behavior. Unfortunately, they may lead us to take the
wrong action. That stock which has lost money may have
become even more attractive as an investment and the one
that is showing us the nice positive number may have already
achieved the growth it�s going to for the foreseeable
future.

The problem is that the only information on the Valuation
report that matters in terms of us making investing
decisions is the total current value of our club assets.
The only question we should be thinking about is: How can I
make this number grow going forward?

That is why, when you begin your discussion about what
investing actions you want to take, put away your Valuation
Report. You should be looking at a report which is
something like a ManifestInvesting Dashboard. This report
is showing you estimates of future returns. They should
guide your decision making, not snapshots of the past.

You can easily pull up a Manifest Dashboard of your club�s
Portfolio using the Manifest button which you will find on
the Accounting>Investments screen. You don�t have to be a
subscriber to see this.

Here�s your assignment for today. First, run a performance
benchmark report for your club for the past 1 year period.
Use VFINX as your benchmark. What is your Relative Return?
(Subtract the VFINX IRR from your club IRR)

Then, go to Accounting>Investments and click on the Manifest
Button. In the bottom left, you will find your Portfolio
PAR (Projected Annual Return). What is this number?

It�s easy to find all these numbers. If you�d like to share
them or you�d just like to know more about how to use them,
let�s talk about it more here in the coming days.

Laurie Frederiksen
www.bivio.com

Laurie Frederiksen on

Hi Andy,

I am glad to hear you are doing this. I heard from another club with similar questions.

Yes, subtracting the two IRR’s gives you the relative return of your investing versus VFINX for the time period you looked at.

I will hope Mark Robertson will jump in with a few more details on what to look for on the Manifest Report and how to interpret the numbers. Your average yield is not unusual.

You will see a value on the report for something called MIPAR. This is the Projected annual return for all the stocks that Manifest follows. The idea is that if you try and manage your portfolio such that your club PAR is greater than MIPAR, you will probably continue to see good results for your relative return.

Laurie Frederiksen

www.bivio.com

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