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Moneyball: Value Investing in Baseball

Moneyball: Value Investing in Baseball

I really enjoy baseball. It’s a great game. No timers, no clocks. The winning team has to get the losing team out at least 27 times.

A great movie about baseball is Moneyball. This film was released in 2011 and it’s about a small market team, the Oakland Athletics, and how they are having trouble competing against large market teams (like the New York Yankees) who have larger budgets and are able to pay more money for the best players. The story focuses around the Oakland General Manager, Billy Beane (played by Brad Pitt), and his quest to find a way to recruit players to form a winning team even though they can’t afford to pay the higher salaries the top talent requires.

Beane finds Yale graduate Peter Brand (played by Jonah Hill) who uses a system for evaluating players based on math. It’s a more scientific approach to player evaluation. Using metrics like on base percentage rather than a traditional batting average and looking beyond things like unorthodox pitching style or age and focusing strictly on performance they are able to find value in players that other people overlook.

Moneyball is based on a true story and the metrics they use are based on the “Sabermetrics” pioneered by Bill James and others.

It’s essentially applying the concept of value investing to baseball. While Billy Beane and Peter Brand looked for undervalued players who would get on base, get runs, and help Oakland win baseball games, value investors look for undervalued stocks that will produce earnings, positive cashflow and make an investor money.

Value Investing: An Interview with Jason Rivera

Value Investing: An Interview with Jason Rivera

I’m very excited to be sharing this interview with Jason Rivera, a man who in his first five years achieved better returns than Warren Buffet did in his first five years. Who is Jason Rivera? Let’s get into the interview and you’ll find out!

John: Can you provide some background on yourself and Rivera Holdings for those who aren’t familiar with you or your company?

Jason Rivera, Chairman, CEO, and Founder of Rivera Holdings Investment Holding Company

Jason: Yes. I’m a self taught value investor who focuses on small and obscure public companies to buy for my investors. And I’m now also looking for private businesses and cash flow producing real estate to buy as well.

I’m the author of the acclaimed value investing education book How To Value Invest. Have run the blog Value Investing Journey for more than five years now. Wrote a 60-page booklet detailing the immense power of investment float that I released for free to readers of my blog and followers – on Twitter and Facebook – titled All About Float. Have written for several publications and investment newsletters including: Seeking Alpha, Guru Focus, Insider Monkey, and Palm Beach Research Group among others.

I mentor others on how to become great value investors, consult on projects requiring business analysis and valuation skills, and run my investment holding company Rivera Holdings LLC. out of the Tampa Florida area.

John: When you were a kid did you know you wanted to grow up to be a value investor?

Jason: Ha 🙂 no. I don’t have any stories like Warren Buffett where he was buying things at wholesale prices – gum if I remember right – and then selling them at a higher price to his classmates as a kid.

Unfortunately, I was far more interested in playing sports, chasing girls, and playing video games than investing when I was a kid.

I always knew I wanted to make money, start businesses, and help people but the value investing part and putting effort into making those things happen only began happening in my late teens and early twenties.

John: Why do you favor value investing as opposed to momentum investing, a passive asset allocation approach or another strategy?

Jason: I don’t remember what first drew me to value investing but once I read about it I knew it was the strategy for me because it made total sense immediately.

I agree with value investing greats like Seth Klarman and Warren Buffett that to some degree having an affinity for value investing has to be genetic.

I never wanted to get into momentum trading because I have a long term mindset – decades not days, weeks, or even years – so that or any other kind of trading never made sense to me.

I’m terrible at predicting things into the future so macro investing was out. And I like the challenge of finding great companies so I would have gotten bored with passive investing and never done it for a long time.

John: I’ve written about the value investing metrics I use. Some of metrics I look at are the result of what I’ve learned from you. I’d be interested in getting your feedback on my approach.

Jason: First of all thanks so much for letting me know some of the content I’ve written helped.

Sitting alone in front of my computer all day reading filings and asset information, or talking with people through phone or internet makes it challenging to know if what I’m doing helps. So thanks a lot.

Everything looks great when it comes to some of the metrics you look at but I do have one quibble…And this is a personal preference so do whatever works best for you.

I prefer owner’s earnings to owner’s cash profits because OE includes working capital while OCP doesn’t. And since I focus more on the balance sheet side of things – at least to start – I find this more useful.

John: It’s clear form your book and website you spend hours and hours analyzing companies before you invest in them. Do you have a process to screen out certain stocks at a higher level so you can deep dive into a specific company?

Jason: I go into great detail on this question with an answer I wrote on Quora to the question: Is there a faster, simpler, more conclusive way to research stocks?

For those who don’t want to read that I’ll give a quick summary below:

First off, I don’t use any screeners when looking for companies to research now and instead rely on my processes and lists to find companies.

I find any lists I’m interested in – ADR list, country list like Brazil or Indonesia for example, or a list of all the OTC companies – and then do preliminary analysis based on my requirements and preliminary checklist. This can be downloaded for free by signing up to mailing list on my blog.

After this, with any companies remaining I do quick “back of the envelope” valuations.

The ones that are overvalued go on a watchlist for later research. And those that are undervalued or fairly valued I do further research on.

For those that are undervalued or fairly valued I then go to both Morningstar and the company’s website to download its most recent annual report, quarterly report, proxy form, and any recent investor presentations.

I read all these, take notes, and if I find too many red flags discard the company.

On the other hand, if the company still looks promising I then revalue it using all the new information.

This is especially important at this stage because now you have a great idea of what the company does, if it has any competitive advantages, if there are any hidden assets, etc.

For any companies that remain promising I then research any competitors for the company. Get all their most recent financials. Take notes on them. And build a spreadsheet of profitability metrics and relative valuations so I can compare them against each other.

If the company still looks good from here I’ll then look for any recent news and developments to consider in my analysis.

At this point I’ll also read and take notes on the company’s financials going back five to 10 years. I’m also looking for things here that could blow up my investment thesis as well.

At this stage if one of the original company’s competitors looks better I’ll begin full research on that company instead of the original one.

After gathering everything, I then begin to write my investment thesis down. These usually end up being between 20 – 50 pages.

This helps me spot any errors in my investment thesis or thought processes. And it’s also valuable so you can go back to see where you made any mistakes or to see what your analysis and reasons for buying the company was months or years from now.

By the time I’ve finished doing all this research, writing, and editing I’ve put well more than 100 hours into researching one idea and its competitors.

The more I learn the more I add as well so this time is a lot closer to 200 hours total now for one idea potential idea.

The beginning of the process helps me weed out the crap companies fast. And the middle and end of the process helps make sure my investment thesis is still sound, while also helping me identify any potential risks or missing thoughts in the thesis.

I analyzed my data a few years back and found I invested in less than 1 out of every 500 companies I researched.

With more experience, knowledge, and refinement of my processes this number is now likely between 1 out of every 750 – 1,000 I end up buying.

But all this work is paying off.

By implementing this strict process I make far fewer mistakes than I used to.

Through the first five full years of my investment career I’ve produced returns of 29.2% for investors – on average not compounded – every year. This is better than the 25.4% Buffett produced in the first five years of his career on average.

John: What Inspired you to write “How to Value Invest”?

Jason: I wanted to help people not have to go through the often times painful, long, and frustrating experience I did in the first several years of learning about value investing.

I wasn’t able to go to a university because of severe health issues at the time. I didn’t have a mentor to guide me in the right direction. And for the most part other than asking questions here and there from other value investors online, had to figure everything out myself.

While this was a great learning experience, and even if I could go back I wouldn’t change anything. I wrote the book to help others avoid the years of wasted time and frustration I dealt with while beginning to learn.

John: This is probably an unfair question, but I’m going to ask it anyway, how do you go from dedicating yourself to being an excellent value investor in February of 2012, to going after an $8 million acquisition as CEO and Founder of Rivera Holdings roughly four years later?

Jason: It’s not an unfair question at all. And I actually think it’s a good one.

Several friends asked me the same thing – or said people they told about the potential deal asked them the same thing after they told them about my age and experience.

For reference, as I queried investors to raise the money for the acquisition I was still 29. I turned 30 in December of 2016 after the acquisition failed. And at that point still had yet to finish my fifth full year of being a serious investor.

I’ve studied and practiced investing for almost 10 years now but the bulk of the first five years were wasted to some degree through the process trial and error learning and frustration I mentioned above.

So what the hell at age 29, with less than five full years of serious experience under my belt as an investor without a degree from somewhere like Wharton or Columbia Business School made me think I can do an $8 million acquisition?

It’s a good question… But I think an even better one is; why not go for it?

I believe anyone can become and do great things if they’re willing to work and put in the time and effort to learn a valuable skill.

At the end of my career I want to be known as the best investor, businessman, and capital allocator ever. Yes, even better than Warren Buffett.

Is this likely, I know the answer to this is no.

But I’ve always shot for the stars… No one ever says they want to be the tenth best investor ever, or the fifth best quarterback ever, or the second best golfer ever, etc.

To do great things I believe you have to have huge goals you can work towards and then do everything in your power to work towards those goals.

So why not start by going after an $8 million acquisition?

Could I have started going after a $100,000 company? Yes. Would it have been far easier?  Definitely. But would $100,000 change my life drastically and allow me to help other people change their lives for the better? No. At least not to the degree I want to help.

Why put limits on your potential, the money you make, and the amount of people you can help?

The saying: “If I could just help one person that’d be enough” has never made sense to me. If you can help one person you can help hundreds, thousands, millions, or even billions. Why stop at one?

This mindset makes even less sense to me after listening to the audiobooks of The 10X Rule and Be Obsessed or Be Average – both by Grant Cardone.

Like I said above I want to help as many people as I possibly can. But to do that requires great sums of money. And to have great sums of money I need to go after big targets.

I’m working towards that. And it just happened that when I began looking I found an $8 million company to go after that was a great business.

Did I plan this when I started looking, no. But again, why not go after it if it’s there?

If I went after a $100,000 target and completed the acquisition I would have a $100,000 company but not learned as much in the process, gained as much experience, or grew my connections like I did and continue doing.

I’d rather fail huge but still make massive progress towards my goals then set small goals, reach them, and still be disappointed by not doing what I truly want to do.

But by doing and going after big things negativity creeps  in so if you go this route you need to be prepared.

Below are some of the negative things I’ve heard since going after that acquisition.

  • He’s crazy.
  • Who the hell is he to think he can go after an $8 million acquisition?
  • Why the hell are you going after an $8 million acquisition? This was one of my own thoughts at the beginning of the process by the way so this isn’t limited to others thoughts.
  • Why are you going after such a big target to start? Again, one of my own thoughts.
  • Can you pull this off?
  • What if you fail?
  • What if you succeed? This question came after someone questioned my experience running this size of a business.
  • You’re so young still, why not take your time and start slow?
  • You’re so young still why do you think you can do this?

Something else I learned from Be Obsessed or Be Average is: “If you can, you must.”

I have the skills and mindset necessary to help a lot of people so I feel an obligation to work towards helping as many people as I possibly can.

Something else that will illustrate why I went after such a big target to start and how my goals are intertwined with that is from a post I wrote on Facebook about a month ago which I repost below.

“I know that I have the ability to ACHIEVE the object of my DEFINITE PURPOSE in life; therefore I DEMAND of myself persistent, continuous action toward its attainment, and I here and now promise to render such action.

I realize the DOMINATING THOUGHTS of my mind will eventually reproduce themselves in outward, physical action, and gradually transform themselves into physical reality; therefore I will CONCENTRATE my thoughts for 30 min. daily upon the task of thinking of the person I intend to become, thereby creating in my mind a clear MENTAL PICTURE.

I know through the principle of autosuggestion, any desire that I PERSISTENTLY hold will eventually seek expression through some practical means of attaining the object back of it; therefore, I will devote 10 min. daily to DEMANDING of myself the development of SELF-CONFIDENCE.

I have clearly written down a description of my DEFINITE CHIEF AIM in life, and I will never stop trying until I shall have developed sufficient self-confidence for its attainment.”

– Bruce Lee

This is a perfect reflection of where I’m at and what I work on every day as well.

Something I’ll add to these thoughts is from Grant Cardone’s book Be Obsessed or Be Average – “If you can, you must”

What this combination of thoughts means to me is that because I have the ability to help people throughout the US and world through my knowledge and businesses, I must – at a moral and ethical level – help as many people in my lifetime as I possibly can.

If I don’t do everything in my power every day to excel, work towards achieving my goals, and build great businesses and wealth to help as many people as I can, I’m betraying my deepest moral convictions and ethics. Failing myself, failing my family and kids, and failing those I could help.

Sorry about this long answer but it’s such a great question you asked which leads to a bunch of other questions and answers.

I hope this question and answer resonate with your readers on some level.

John: Is Rivera Holdings open to non-accredited investors?

Jason: Yes it is. If they’re based in the United States and are either US citizens, green card holders, or naturalized citizens.

Unfortunately, I can only accept outside the US investors at this point if they’re accredited.

John: Where can folks go for more information about investing with Rivera Holdings?

Jason: They can visit my website and go to my blog Value Investing Journey for more information on Rivera Holdings. At the following link they can also view The Rivera Holdings Acquisition criteria. And here they can sign up for the Rivera Holdings mailing list where I send out potential deals I’m working on that investors can invest in.

This mailing list is also where I share some of my exclusive past recommendation issues/investment thesis with subscribers.

Thanks a lot for having me on to do this John.

John: Thank you very much Jason.

How I Handled the AmTrust Selloff

How I Handled the AmTrust Selloff

On Tuesday 11 April 2017 one of my Value Stock Picks: AmTrust Financial Services (AFSI) dropped from $18.87 down to as low as $13.65 then closed at $15.30. The catalyst was a Wall Street Journal Article titled “Secret Recordings Play Role in SEC Probe of Insurer AmTrust”.


AmTrust Financial Services has been on the rocks anyway after advising that financial statements dating back to 2014 were not to be trusted.


About half of the selloff occurred pre-market

The initial panic selling in these instances is often overdone.

Using Stock Options to Manage Risk

With the implied volatility of the stock so high I decided to sell a vertical bull put spread around noon eastern time. The vertical bull put spread is an option position that makes money if the stock is above a certain price (in my case $12.80) when the options expire.

I sold a 15 put and bought the 10 put with a September expiration. Total credit was $220.

By mid-morning on the 12th AFSI had rallied back to around $16.

On paper I had already made some money on the vertical put spread. I decided to sell the 17.5 September call for $200 in credit. I did this for downside protection. This created a half strangle/half iron condor.

Just looking at the options, my break even point on the downside is $10.81 and on the upside it is $21.74. The option market seems to think there is a greater chance of AFSI going back down as opposed to rising. Currently my position is fairly centered. If AFSI does sell off and start to approach my downside break even I will roll down the call I sold.

My maximum gain is $420 if the stock is trading between $15.06 and $17.40 at expiration in September. I will look to close out this position if I get to 50% of that profit.

I’m currently long 25 shares of AFSI. If I didn’t have the option position and the stock dropped down to say $10, I would be at a paper loss of about $211. With the options the loss at a stock price of $10 would be $160. So by adding options to my stock position I’m limiting my losses and also increasing my potential gains if the stock settles down between $10.81 and $21.74 and volatility drops.

The main risk I have, is if the stock were to really take off above $21.74 before September, I would start realizing losses on the option position, whereas if I was simply long the stock I would be sitting on gains.

Given the large drop and the negative press I think this is unlikely. The September 17.5 call also indicates this is unlikely, with a 25% chance of AFIS being above $19.51 in September. Furthermore, if AFSI would to start to go up significantly, I would anticipate implied volatility dropping and I would probably be able to close out the short call at a small loss or perhaps even a gain.

My overall gain/loss looks as follows.

Obviously using options like this isn’t for the feint of heart. Options used emotionally and incorrectly are a great way to loose lots of money fast.

But in this case I’m actually limiting my risk and increasing safety. If AFSI sells off I reduce my downside risk, if volatility drops and AFSI stays rangebound I make money. The main risk is if AFSI takes off again before September and trades above $22.79. In this case I start to lose money. Based on the option probabilities and recent history I judge this to be an unlikely scenario.

AmTrust Financial has issued a statement essentially denying the Wall Street Journal article’s claims and while I am waiting to hear more this selloff could represent a buying opportunity.

As always this is not investment advice. I’m not advising or recommending anyone buy or sell any security, stock or option. I’m simply sharing what I am doing.

Value Stock Picks – March 2017

Value Stock Picks – March 2017

I’ve been reading How to Value Invest by Jason Rivera and I’m applying what I learn to the value investing metrics I’m use.

The overall principle of value investing remains the same: purchase shares of companies for less than their intrinsic value. I’m simply trying to find the best way to do that.

Some of the additional metrics I’ve been considering at are the EBIT plus cash and cash equivalents / outstanding shares multiples. I’m also looking at the quick ratio and current ratio as ways to measure company solvency as well as net cash per share and insider ownership.

That might sound like a foreign language but I’ll be creating an updated value investing metrics article in the coming weeks that dives into each in more detail.

March Value Stock Picks

FutureFuel (FF on NYSE)

From Google Finance: “FutureFuel Corp. is engaged in the chemical and biofuels business. The FutureFuel Chemical Company, a subsidiary of Company, manufactures chemical products and bio-based products comprising biofuels and bio-based specialty chemical products. The Company operates in two segments: chemicals and biofuels. The chemicals segment manufactures chemical products that are sold to third-party customers. The biofuels segment primarily produces and sells biodiesel to its customers.”

Enterprise Value to Market Capitalization is at .5, EV/FCF is 3.541, and the EV/EBIT ratio is 7.472 (the ratios measure the value of the enterprise relative to free cashflow and earnings before interest and taxes). FF has a yield of 1.72% with a sustainable 18.62% payout ratio. Net Cash per Share is $3.68. The five year average return on equity has been over 5%. A current ratio of 2.814 ensures FutureFuel can service it’s debts. It is a little pricey at around 11 times EBIT plus cash and cash equivalents per share. It is owned over 18% by insiders, which is a good thing.

Enzon Pharmaceuticals Inc. (ENZN on OTC Markets Group)

From Google Finance: “Enzon Pharmaceuticals, Inc. receives royalty revenues from existing licensing arrangements with other companies primarily related to sales of four marketed drug products: PegIntron, Sylatron, Macugen and CIMZIA. The Company has no clinical operations and limited corporate operations. PegIntron is used both as a monotherapy and in combination with REBETOL (ribavirin) capsules for the treatment of chronic hepatitis C. Macugen is used for the treatment of neovascular (wet) age-related macular degeneration. Sylatron is used for the treatment of melanoma. CIMZIA is used for the treatment of moderate to severe rheumatoid arthritis and Crohn’s disease. CIMZIA is a biologic medicine that counteracts tumor necrosis factor (or TNF), which promotes inflammation of the joints in rheumatoid arthritis.”

Enterprise Value to Market Capitalization is at .3, EV/FCF is 1.3 and EV/EBIT ratio is just .52. Net Cash per Share is $.15. The five year average return on equity has been over 5%. Although the trailing twelve month ROE has been negative 6%. A current ratio of 8.4 ensures Enzon can service it’s debts. Even at 5 times EBIT plus cash and cash equivalents it has a a large margin of safety at over 70%.

AmTrust Financial Services (AFSI on NASDAQ)

From Google Finance: “Amtrust Financial Services, Inc. (AmTrust) is an insurance holding company. The Company, through its subsidiaries, provides specialty property and casualty insurance focusing on workers’ compensation and commercial package coverage for small business, specialty risk and extended warranty coverage, and property and casualty coverage for middle market business. Its segments include Small Commercial Business, Specialty Risk and Extended Warranty, and Specialty Program. The Small Commercial Business segment is engaged in providing workers’ compensation, commercial package and other commercial insurance lines produced by wholesale agents, retail agents and brokers in the United States. The Specialty Risk and Extended Warranty segment is engaged in providing coverage for consumer and commercial goods and custom designed coverages. The Specialty Program segment is engaged in writing commercial insurance for defined classes of insureds through general and other wholesale agents.”

Enterprise Value to Market Capitalization is at 1.37, EV/FCF is 3.6 and EV/EBIT ratio is 6.218. AFSI has a yield of 3.44% with a sustainable 22.76% payout ratio. Net Cash per Share is a whopping $45.40. The five year average return on equity has been over 5%. A current ratio of 2.98 ensures AmTrust can service it’s debts. Even at 5 times EBIT plus cash and cash equivalents it has a a large margin of safety at over 75%. It is 16.68% owned by insiders.

I’m planning on opening positions in each of these three securities.

Data is from

None of this information is a recommendation to buy any security. I’m just sharing some of the value stocks I like.

US Value Stocks have Outperformed Since 1972

US Value Stocks have Outperformed Since 1972

Stocks are one of the key ways I grow my wealth.

I like value investing and value stocks. It’s not some aesthetic or subjective reason. As an asset class US value stocks have a history of outperforming other US stock classes.

I like picking individual stocks but I appreciate that is not suitable for everyone. For some folks a passive index asset allocation strategy could be better.

Equally Weighted Large, Mid, and Small Cap Portfolio Performance Since 1972

If one were to have invested $1,000 in the a portfolio consisting of roughly equal allocations of large market capitalization (“Large Cap”) stocks, mid-cap and small cap stocks in January of 1972, it would have grown to $132,330 by January of 2017. The compound annual growth rate (CAGR) of this portfolio was 11.45%. The maximum drawdown around the 2008 financial crisis was 52.70% (stressful).

During this same time, if one were to invest $1,000 in “US Stocks” the CAGR would have been 10.21%, balance on January 2017 would have been $80,008, and the maximum drawdown would have been 50.89%.


What about Growth Stocks?

A portfolio with 1/3 large, 1/3 mid and 1/3 small cap growth stocks would have done even worse than the allocation above. The CAGR since 1972 has been 10%, the maximum drawdown was 58.6% (wow!), and $1,000 would have grown to $73,508.

So growth stocks performed worse.


US Value Stocks have Outperformed

US value stocks have outperformed growth stocks. A portfolio mixed with 1/3 large cap value, 1/3 mid cap value and 1/3 small cap value would have a CAGR of 13.11%.

A $1,000 investment in 1972 would have grown to $258,618. The maximum drawdown would have been slightly higher than straight market cap stocks, at 55.79% (still stressful) but less than the growth stock portfolio.


What it All Means

There are two main takeaways.

  1. Value stocks outperform other stocks classes
  2. A small increase in the CAGR has a large impact if the time horizon is long enough
  3. US value stocks had a lower maximum drawdown than growth stocks
  4. US value stocks have higher maximum drawdown than stocks in general


For more details on this data see the FAQ.

Average Returns: A Fairy Story

Average Returns: A Fairy Story

Imagine if you will your fairy godmother appears and you’re given the opportunity to backdate one trade to five years ago.

You’re given 1,000 dollars and you’re presented with three investment choices.

For each option she tells you the annual gain or loss as well the average return:

Investment One

Investment Two

Investment Three

Now your fairy godmother told you the average annual return for each is 10%. So, one might be tempted to assume each investment will perform the same!

But you don’t get average returns so this number is not particularly useful.

Total Return

You want to choose the one that has the highest total return. Total return is just a fancy way of saying how much an investment went up (or down) from it’s starting value.

So you’d take the starting amount, $1,000, and add the gain or loss from the first year, second year, etc, and see how much the $1,000 is now worth after five years. The percentage increase from the original value to the ending value is the total return.

Total return would be 54.57% for investment one, 51.63% for investment two and lastly investment three has a total return of -4.96%, even though the average return for each was the the same: 10%.

Compound Annual Growth Rate

Investors typically want to know how an investment tends to perform each year. A useful way of seeing how an investment does each year in a way that smooths out up years and down year that is more useful than average returns is the Compound Annual Growth Rate (CAGR).

CAGR is calculated as follows:


I’ve calculated the CAGR for you below.

Investment One

Investment Two

Investment Three

So if the fairy godmother had provided the CAGR; it would have a been a useful number to determine which investment had the highest total return.

Why Do fairy godmother’s overcomplicate things?

Why wouldn’t your fairy godmother just give you an even $1,500 and call it a day?

I don’t know.

Cinderella‘s fairy godmother gave her until midnight to get back home. Why didn’t she give her a year to get back or just make the pumpkin turn into a carriage permanently?

Why weren’t the slippers made out of something more comfortable and durable than glass?

Cleary there is NOT a precedent for the pragmatic or straightforward. So don’t ask me to explain how fairy godmothers operate. But lest I upset the fairy godmother community I think the principle of don’t look a gift horse in the mouth also applies. After all, she’s hooking you up with the ability to backdate a trade.

You don’t get the Average Annual Return

At best the average return % isn’t useful. At worst the average return is rather deceptive–but that is the number that most mutual funds list.

While not without it’s limits, the compound annual growth rate is much more useful than average returns and it is something to keep in mind when evaluating an investment.

Average returns tell you very little while the compound annual growth rate shows you which investment would have had the highest total return.