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I am a retail investor investing directly in equities in the Indian stock markets. I would like to understand the correct way to compute the return on particular stocks in my portfolio, which I have accumulated over time, and parts of which I might have sold over time.

Here is an example of a stock -- Motherson Sumi Systems Limited (NSE:MOTHERSUMI) -- that I have purchased in tranches over the last year and a half. The chart below shows the price of the stock over that time period, and the red vertical lines show the dates on which I made purchases, and the green line shows the date on which I sold a certain portion of the stock.

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The complete list of purchases is available in this Google Sheets sheet.

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The "Date Sold" column gives

  • the date on which that tranche of the stock was sold (using the FIFO principle -- that is if I hold 200 units of stock, and sell 20 units, I am required to recognize that as the sale of the first 20 units of the stock that I purchased and compute the return accordingly), or
  • if that tranche of the stock is not sold, then the current date, in which case the "Price Sold" and the "Sell Amount" are the current price, and the current market value of that stock.

The CAGR is computed in the usual way for each tranche:

CAGR

Note that he CAGR is computed the same way for each tranche, whether it has already been sold, or whether it is held at the moment.

Questions:

  • Is CAGR the right way to compute the return on stock investment tranches? If there is no right way, and CAGR is one way, what is the interpretation of the CAGR? What are some other ways to compute the return on tranches?

  • What is my annualized return on my investment in Motherson Sumi Systems Limited till date? That is, how do I average the return across individual tranches into one return from the buying and selling pattern on this stock?

  • Why are there two different selling prices for Oct 1,2017 – DJohnM Oct 1 '17 at 12:50
  • @DJohnM Good eye! Note that there are two different prices for today's date (1st October 2017). That is because this stock offered a bonus issue in the ratio 2:1 on 5th July 2017, and to account for this, I have multiplied today's actual price (336.45) by 1.5 for all (unsold) tranches that were bought prior to 5th July 2017. You will see this in the calculation in the sheet as well. – tchakravarty Oct 1 '17 at 13:22
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So, there is no truly "correct" way to calculate return. Professionals will often calculate many different rates of return depending on what they wish to understand about their portfolio. However, the two most common ways of calculating multi-period return though are time-weighted return and money-weighted return.

I'll leave the details to this good Investopeadia article, but the big picture is time-weighted returns help you understand how the stock performed during the period in question independent of how you invested it it. Whereas money-weighted return helps you understand how you performed investing in the stock in question. From your question, it appears both methods would be useful in combination to help you evaluate your portfolio.

Both methods should be fairly easy to calculate yourself in a spread sheet, but if you are interested there are plenty of examples of both in google docs on the web.

  • Okay, thanks for this. I will try to update my question with the computation of a couple of different types of returns and try to interpret them. Would be helpful to have those computations and interpretations validated. – tchakravarty Oct 3 '17 at 1:23

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