FIN 52 Calculating Returns and Variances

Welcome to module nine. This module is called calculating returns and variances. And, you know, we've been buying bonds, buying stocks, making investments in projects. How can we talk about our returns? How are our investments doing? And how do we compare one to another? That's what this chapter is all about. And you may think it's simple, but in fact, I have a true story from my real life where I got in a big fight with a friend over this very topic. So here's the story. And I think you'll understand what's happening. So my friend and I were, you know, follow the stock market. We're interested in various stocks and we both sort of eyed up stocks. And I said, Oh, I think blue company is a terrific company. Obviously making up the names of the stocks. It's not blue and green, but you get the idea. And my friend, he said, no, no green companies, the much better company. It just so happened. Their stock prices were around the same, but for our conversation, let's pretend the stocks were both sitting at a hundred dollars. And I said, well, let's make a friendly bet a year from now. I bet you, if you had invested in blue company, you'd have a better return. Uh, then you'd get out of green company. He said, no way green company is going to have the higher stock price. I'd pick green company all day. And so that was, we shook hands and made a bet. Little did we know we bet on two different things in that moment and it caused drama. So a year goes by one year later and these were the stock prices. And so, you know, my stock appreciated to $110, his to 112. And you might think open shut case, Tony loses the bet, but a big part of my investment hypothesis was I liked dividend paying stocks and so my stock had in the meantime paid a $5 dividend, $5 per share, 5% dividend. And so in my mind, my stock had returned 15%, 10% in capital gains or stock appreciation, $10. So again, the math here is one 10 minus a hundred is $10 over a hundred. That's 10% gain in the stock going up and five on my a hundred dollar investment, 5% is my dividend. So my total return on the investment is 15%. My friend said, no, no, no number go up. My stock went to one 12. That's a 12% return. Last time I checked 12 is greater than 10. I win. And I said, the fight was unresolved. And I think the reason was we thought we were betting on different things. I said, I think my stock will have better return. He said, he thinks his stock's going to a higher number. We kind of said different things, but as an investor, I think most investors would prefer this situation, right? You would be happier to have owned stock blue for a year than stock green. That's what I left convinced of that. And I said as much, and he said, no, I didn't lose. I think he was being, uh, you know, not being cool in, uh, not giving in on the bet. So in any event caused a bit of a fight in my friendship because we couldn't agree on how to calculate returns. Well, after this chapter, you're going to know how to calculate returns. I think you'll think I won the bet, but maybe not. I wonder what you think. Anyway, uh, stay tuned for a whole series of videos on doing just that. See you in the next video. Bye for now.