Thanks for this post. I really enjoyed it and found it really interesting and insightful: it really made me rethink IRR in a way I hadn't thought of. Given some of the issues highlighted, I had a couple of other questions adjacent to the topic. Let's say that you have forecasted IRRs for several stocks calculated for next four years (using dividend yield, eps growth, and multiple). Can these be compared to a hurdle YTM (IRR) of a 10Y government bond (2 cpn per year), or 4Y forecast IRR of the spx index, given differences in cash flowss? Additionally, if one wanted to calculate the portfolio IRR for the same several stocks , would it be wrong to take the average weighted IRR? Or would one need to look at all of the underlying cashflow in aggregate and calculate the IRR on this? Many thanks.
This is not what you asked for but it won't surprise you that as a preliminary remark I say that IRR is probably not he best ratio to use! (Prof. Phalippou suggests using modified IRR) .
q1: yes they can be compared but i'm not sure what conclusion you can draw
q2&3: you need to calculate the aggregate flows (averaging the IRRs only works if flows are similar)
if IRR was 'the return', not only we would have beaten Buffett and all the investing legends, but doing so by a big big margin! Let that sink in ... and bring the sink ;)
Thanks for this post. I really enjoyed it and found it really interesting and insightful: it really made me rethink IRR in a way I hadn't thought of. Given some of the issues highlighted, I had a couple of other questions adjacent to the topic. Let's say that you have forecasted IRRs for several stocks calculated for next four years (using dividend yield, eps growth, and multiple). Can these be compared to a hurdle YTM (IRR) of a 10Y government bond (2 cpn per year), or 4Y forecast IRR of the spx index, given differences in cash flowss? Additionally, if one wanted to calculate the portfolio IRR for the same several stocks , would it be wrong to take the average weighted IRR? Or would one need to look at all of the underlying cashflow in aggregate and calculate the IRR on this? Many thanks.
Thanks for your comment and question.
This is not what you asked for but it won't surprise you that as a preliminary remark I say that IRR is probably not he best ratio to use! (Prof. Phalippou suggests using modified IRR) .
q1: yes they can be compared but i'm not sure what conclusion you can draw
q2&3: you need to calculate the aggregate flows (averaging the IRRs only works if flows are similar)
Thanks for the feedback: I really appreciate it. Also enjoying your podcast and learning a lot.
if IRR was 'the return', not only we would have beaten Buffett and all the investing legends, but doing so by a big big margin! Let that sink in ... and bring the sink ;)
Yes! it's proof by contradiction