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This is a long post. Those considering using CSI data can
skip most of this post, but do read the next line.
Be sure to check the check box for "proportionally"
adjusted dividend data in the Preferences section for
charting historical prices.
The rest of the post explains why most users will want to
use "proportionally" adjusted dividends. The post also
attempts to explain why most can ignore CSI's warning that
the "proportionally" adjsuted data will provide results
that are "Not right P/L..."
If you evaluation P/L in percentage terms, you want to use
"proportionally" adjusted dividend data. However, if you
are a special user who evaluates P/L in absolute dollars
rather than percentage terms, then the CSI warning would
apply to you.
Confused?
If so, I guess you will have to read the rest of this post.
At the following menu in CSI's UA program:
Preferences/Charting Preferences/Historical
Adjustments/Stock Adjustments: the 3rd check box reads:
"Adjust Dividend/Capital Gains proportionally
"(Not right P/L, but no negatives)"
By this CSI seems to mean the P/L or Profit and Loss will
not be correct in absolute dollar terms.
I do know that if one does not check this box, the profit
and loss will be right in absolute dollars but WAY OFF THE
MARK in PERCENTAGE terms.
To see why you must use the "Proportionally" choice
consider the following example. I will use a hypothetic
stock to simply the discussion, but many dividend stocks
produce an even more pronounced effect.
Consider a stock XYZ which begans last month with a price
of $10 and ends the month at $11 and received a once a year
dividend of $1 during that same month.
Without any dividend adjustment, the data would show a
price gain of $1 and thus a profit of 10%. But in fact the
gain was 20% for that month.
So obviously one wants dividend adjustments to be made.
However, if one just turns on dividend adjustment option,
but does not turn on the "proportionally" option, here is
what will happen. CSI will simply substract the dividend
amount from prices prior to the dividend. So the price of
the stock at the beginning of the month will now be
adjusted down by $1 (the amount of the dividend) to $9. The
result is the dollar gain from month beginning to end is
correct = $2 gain ($1 price gain + $1 dividend). However
the percentage calcuation of gain will be off: $2 gain on a
$9 starting point would look like a 22% gain.
You might think begin off by 2% is tolerable. I agree. But
that is just the effect of 1 year's dividend. What happens
if the stock has paid $1 dividends each year for the last 9
years? Well nine years ago, the subtraction method of
dividends adjsutment (ie, the non-proportionally method)
would adjust the starting price of the stock down by $9
(nine years of $1 dividends). Assuming it had an actual
price of $10 nine years ago, the adjusted price would be
recorded as $1.
I think you can see the problem coming.
Well if you do not think in percentage terms, there will be
no problem. In absolute dollars the gain will be correct
between then and now. A gain of $10 (ie, $11 - $1 adjusted
price, or $1 of gain in the last month plus $9 worth of
dividends over the years).
But if you think in percentage terms, like I do, it would
appear that a $1 stock had increased in value to $11 over
the past nine years. And that looks like a 1,100% gain.
WOW. That would really mess up back testing.
To avoid such a mess one must check the box for
"proportionally" adjusting dividends. With a proportional
method the price of XYZ nine years ago would be adjusted to
$5. Why $5? So that the $6 gain from $5 to today's price of
$11 would result in a percentage gain of 110%. So
proportionally adjusted dividends will produce prices that
will give reasonable results in percentage terms.
So why does CSI/UA say "Not right P/L, but no negatives"
for the "proportionally" adjusted option?
My guess is it is a hang over from their original
background as a futures/commodity data provider.
Some traders of futures contracts might want to know the
absolute, not pro-rated price gain or loss. In our example,
some people doing back testing might want to have price
gains and losses of nine years ago to be of the same
magnitude as today's gain or loss -- without having to do
percentage calcuations. My guess is that CSI's warning "Not
right P/L, but no negatives" is meant for such users.
But that warning does not apply to users like me, who want
profit and loss in percentage terms. In fact, to not use
"proportionally" adjusted prices would result in Percentage
P/L that is not correct.
b
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