SHARPE INCOME … A Mathematical Drift on Performance

Posted on Sep 7 2015 - 7:30am by Sharpe Trade

The original Sharpe Income post that explains this project can be found here.

The Sharpe Income category be found by clicking on that red ‘Sharpe Income’ tag next to this post title, or by clicking here.

We continue the discussion from the last entry.


Of the capital contributed this week, we moved 92% of this contribution towards the category reserved for purchasing our assets dedicated to capital gains. The remaining 8% of the capital contribution was placed towards the cash that we simply have ‘on-hand’ in the form of ‘dry powder’ to buy income assets.  

We then moved all of that cash from general income purchases, towards a purchase of Colgate (CL). 

So you will notice on the PDF that is attached below, the new allocations …  

Sharpe Income Cash Allocations CR

So now what?

We continue with the same plan that we had mentioned in an earlier entry. We continue to build cash, for our capital gains assets.  Although the capital gains strategy is currently beating the S&P 500 Index, it is far, far too early to claim any sort of ‘victory’ lap when it comes to capital gains.  We’re just beginning to purchase assets in that ‘basket’ of the project.

We could buy a share of PCY, commission free for the capital gains strategy.  But for right now, I want to hold off, and build a bit more cash as the weeks pass by.

Why?  Why not buy more PCY if we can?

Because we already hold PCY, at about these levels.  So I will wait.

Also note that I’ve run into a bit of a mathematical issue in counting performance.

For some weeks now, I have had the cash to purchase Union Pacific (UNP).  I have chosen not to do so.  And thus I have been performing well against Union Pacific (UNP) in my choice.  However, the kicker here is that I have not counted this in my favor, in terms of performance.

Think about it …

I have $305.00 available in this project, and have had that $305.00 available for weeks dedicated to purchase Union Pacific (UNP).  That cash has sat there for some time.

But I did not purchase Union Pacific (UNP), as it was demonstrating that it had further to fall.  

If I had invested that $305.00 immediately, the position would have sunk by nearly 30%.  But I chose not to, and thus, for several weeks now, I have been outperforming Union Pacific (UNP) as a position, by choice … by 29%.

Sharpe Income Performance

This benefit has not been reflected.

So now what?  If I correct this oversight by the full spread from the $305.00 invested as a single position?  Then my performance, quite frankly, looks too good, I believe.  And … well … “lumpy”.  Come 2016, this problem will be simply solved, as we will have a new yearly balance from whence to count our performance metrics.  But in the here and now, this advantage is not being reflected.

I could go back to the moment that the $305.00 was reserved for Union Pacific (UNP), and then calculate the spread advantage that I have on that one asset.  However that would change the results (to my favor, to be sure), for the last several weeks.  I’m not really too keen on changing the results as they have been published for some time.  I will simply correct the drift that has occurred, from this point forward.  So I have decided to take a small hit to my performance (hey, I’m magnanimous like that) in the here and now.  I will continue to correct oversight … slowly and incrementally … as we progress into the future.  This is not counting a capital contribution towards my gains.  I’ve had the capital dedicated to that asset, and built a 30% advantage that I have not counted. Once I purchase Union Pacific (UNP), we will no longer need to do this.  You will note on the spreadsheet that tracks this progress, I have made slight correction on the very first sheet, for the weekly “2015” performance.

The link to the Google Drive Spreadsheet that you can view, that we will edit, build upon and refer to over time can be found at this link.

We continue the Sharpe Income project with this next entry.

The Sharpe Income PDF breakdown for Week 41 can be found here (numbers computed off of Friday’s close) ….

2 Comments so far. Feel free to join this conversation.

  1. Anonymous September 7, 2015 at 10:43 am - Reply

    Dan,

    I was wondering what exactly you do with the dividends that come from the income assets and the ones that come from the capital gains positions?

    For example do the dividends from income section go to “dry powder” section and the capital gains dividends go to the capital gain section as cash reserved for future capital gains?

    • Dan September 7, 2015 at 1:36 pm - Reply

      Heyya mate,

      Many times, yes. That’s the way I will work it.

      At the moment, I am considering dividends posting as part of a ‘synthetic DRIP’. The get reinvested back into assets. But instead of turning it on as a ‘straight DRIP’, and having the broker do it, I decide how I will re-invest the dividends that come in, back into assets.

      Hope that makes sense.

      🙂

      Regards,
      Dan

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