Investor Tool #1: Calculating Returns

To calculate returns for any period, take the price or index level on the ending date, divide by the opening price or index level on the beginning date, and subtract 1.

For example: What was the price return of the S&P 500 for calendar year 2005?

On December 30, 2005 (the last trading day in 2005) S&P 500 price level was 1248.29. On December 31, 2004 the S&P closed at 1211.92

(1248.29/1211.92) - 1 = 3.0%

Note: When measuring performance, use the closing value of a security or index on the day before the beginning date as the beginning value.

The mathematical formula for beta can be intimidating at worst and tedious at best. However if you have a computer and Excel, it's a cinch. Beta to your heart's content. First, make sure you have enough data points to make it meaningful. Then get returns for both the performance of the security you want to compare and the market you want to compare it to.

For example:

   GE S&P 500
1/31/2005 -1.01% -2.44%
2/28/2005 -1.97% 2.10%
3/31/2005 2.44% -1.77%
4/30/2005 0.39% -1.90%
5/31/2005 0.77% 3.18% 
6/30/2005 -4.41% 0.14% 
7/31/2005 -0.43% 3.72% 
8/31/2005 -2.58% -0.91% 
9/30/2005 0.84% 0.81% 
10/31/2005 0.71%  -1.67% 
11/30/2005 5.34% 3.78% 
12/31/2005 -1.18% 0.03%
 =slope(I73:I84, J73:J84) 

The slope function in Excel will give you beta for the period you specify. If beta=1, GE generally tends to move in tandem with the S&P 500. If beta<1, GE is generally less volatile than the market. In the period shown, beta is 0.28. That is, GE's movement is estimated to be 28% as much as that of the market.

Note: calculating r-squared is so similar you might as well learn that here. Swap out the "=slope()" for "=rsqr()" and ta-da! You know how to calculate r-squared.

Investor Tool #3: Economic Freedom

I'm rather fond of the Heritage Foundation's annual Index of Economic Freedom. Each year they rank countries based on a number of criteria, including but not limited to trade policy, government intervention in the economy, banking and finance, and property rights. It's an unbiased way of injecting bias into the statistics we look at in measuring the macroeconomics of countries and making them relevant to our investing studies.

Never underestimate the environmental impacts of government regulation or legislation on an investment strategy. Legal controls affect markets more materially than most things you would probably think do but really don't.

For instance, you would probably expect the US to rank #1. After all, we greedy capitalist pigs expect our global superpower status to elevate us. Think again. Think 11. We're beat by places like Ireland, Iceland, and Estonia. To find out why you can buy the book, or you can find everything that's in it online. There are reports on individual countries and there are reports on each criterion. Educate yourself and build a powerful investment strategy.

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Investor Tool #4: Consumer Confidence

Possibly the most popular measure of consumer sentiment is The Conference Board's Consumer Confidence Index. A survey of US households on current economic conditions, it is widely cited in news media.

Like other economic indicators that are sometimes misunderstood, the best way to be sure what newscasters are spinning is true is to look at the data yourself. Look at it historically for anomalies. Compare current conditions to longer historical averages to see if the media is sensationalizing normal levels. Do this with all economic data in order to form a strong investment strategy.

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Investor Tool #5: Investment Fund Flow Statistics

To get a gauge on sentiment sometimes means looking to see which way money is moving. A great industry site is that of the Investment Company Institute. A great deal of America's savings is socked away in mutual funds. You can look at historical figures and recent trends in fund flow.

Are investment strategies shifting from equity funds but increasing in bond funds? Investors are bearish. Is money leaving equity funds and going into cash funds? Investors are really bearish. Is money leaving cash funds but moving into equity funds? Or are funds simply pouring into equity funds? That indicates sentiment is bullish. The "Statistics & Research" section details flows of funds categorically.

Other areas of interest include reports on how mutual fund fees are changing. See if you're paying too much for your mutual fund investment strategy.

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Reprinted with permission from John Wiley & Sons, 2006.


Accretive - Anything making a firm's value grow, particularly as reflected in earnings-per-share.

American Depository Receipt (ADR) - Receipt for a foreign firm's share, paid for in American dollars and traded on American exchanges. Americans trading in ADRs needn't exchange dollars for foreign currency.
Annualized Average (or, Geometric Average or Mean) - Rather than an arithmetic average (or mean), an annualized average properly calculates annual investment returns. To get an annualized average, multiply 1 plus each year's return, raise it to the power of the nth root (where n is the number of years), and subtract 1.
Ask - Also known as the offer, the ask is the price a seller is willing to accept for a security. The difference between the bid and ask is known as the bid-ask spread. See also bid.