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Measuring Stocks Right

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Facebook recently crossed above its $38 IPO share price and the media celebrated. But it took 440 grueling days to accomplish that feat. More importantly, what’s been Facebook’s true progress as a publicly traded company? What about other stocks?

Measuring the performance of a stock versus the broader market is one way to gauge the true success or failure of an investment. Let’s use this yardstick to calculate Facebook’s actual returns.

Since its IPO debut on May 12, 2012, Facebook gained just 8% compared to a 26.14% rise in the SPDR S&P 500 ETF(SPY) and a 28.99% increase in the NASDAQ Composite ETF (ONEQ); these figures are through the Aug. 30 market close. By these broad measures, Facebook has been a genuine bust. Put another way, a $100,000 investment in Facebook’s IPO would be worth just $108,000 compared to $126,140 in SPY or $128,990 in ONEQ over the same period.

Comparing a stock versus its peer industry sector is another way to measure performance.

Facebook, since its IPO, has underperformed sector peers like the First Trust Dow Jones Internet ETF (FDN) by an incredible 38.17% and the Global X Social Media ETF (SOCL) by 24.58%. Put another way, had you invested $100,000 in Facebook’s IPO you’d still be stuck with that same amount, whereas if you had invested in an ETF of Facebook’s peers like FDN or SOCL, you’d have $138,170 or $124,580 respectively.

This same methodology for comparing performance can be used on just about any stock. In fact, using this powerful technique can help you to uncover equity deadbeats that may be lingering in your clients’ investment portfolios.

One notable example of a deadbeat stock is Microsoft.

Over the past 10 years, Microsoft’s share price has climbed just 17.69%, whereas an investment in the company’s peer sector group, the Select Sector Technology SPDR (XLK), has gained 64.23% over the same time frame. On a $100,000 investment, the investor is left with approximately $46,500 more had they invested in XLK instead of MSFT. That’s enough money to buy a new BMW!

The message of this exercise should be loud and clear: Start measuring the performance of individual stocks—the right way.


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