Ask Colin

Could you please give me an indication of the sort of annual average percentage return you get on your capital?

Measuring annual average return is a tricky business. There are many different ways it can be done and different people will have varying points of view about it. I will tell you how I do it and what my results have been.

But first I must tell you that I have only been rigorously measuring it in recent years. I considered going back and trying to do the same kind of job on past years. However, the reality is that it is a huge job and some records are no longer in existence. More importantly, it is probably irrelevant. This is because I used to be a trader, but have evolved into an investor. My trading plan developed over many years. Initially it was ill-defined. Then it was written down, but I kept improving it. Then I realised that investing to catch big trends was a better game than trading, so it evolved further. This means that what I have done in the past is not truly comparable with what I do now. I tried to make an estimate in the late 1990s of how I had done since 1987 and came up with an average of about 13% after tax. However, I am the first to admit this is probably inaccurate and over-stated. It is of little use in assessing my current style as discussed above.

So, what I do is this:

1. I measure my results in financial years ending June 30. I began doing this rigorously from July 1 2000, which means that I started near the top of the 1990s bull market.

2. I mark my share portfolio to market at June 30. This gives me a total of unrealised capital gains net of unrealised capital losses for the year.

3. To this I add realised capital gains net of realised capital losses.

4. To this I add dividends actually received in the year.

5. To this I add interest earned on my cash reserve.

6. I express the total of items 2 through 5 as a percentage of my time-weighted average capital for the year.

7. This is my pre-tax return, which is the best number to use for comparison purposes. Note that my return includes transaction costs, but not overhead costs. These are negligible in relation to my capital and shared in large part with my writing and teaching activities.

In assessing this result, it should be compared to how the market has moved in the year. I compare it to the ASX All Ordinaries Index. However, I consider that the most legitimate comparison is to the ASX All Ordinaries Accumulation index, which assumes reinvestment of dividends.

My results are:

Year My Return % Change All Ords.% Change in All Ords. Accum.%

2000-01 +9.15 +3.69 +7.35

2001-02 +1.76 -5.98 -2.79

2002-03 +19.70 -5.57 -1.47

2003-04 +16.13 +17.72 +22.37