Saturday Morning Muse with Andrew Temte

Episode: The Many Faces of Return: Understanding Investment Performance
Date: August 23, 2025

Episode Overview

In this concise episode, Dr. Andrew Temte digs into the concept of "return" in the context of investing, explaining why there are several ways to measure investment performance and why distinguishing between them is crucial to smart financial decisions. He uses engaging analogies, clear explanations, and a brief tour through the history of financial thought to drive home practical takeaways for both new and seasoned investors.

Key Discussion Points & Insights

1. Why "Return" Means Different Things

• Analogy to Temperature Scales (00:50):
  • Temte compares measuring returns to measuring temperature, emphasizing that just as Fahrenheit, Celsius, and Kelvin serve different purposes, so do different return calculations.
  • "Each return calculation that we will learn about serves a specific purpose and tells us something different about an investment's performance." (01:15)
• Returns help answer different investment questions depending on circumstance.

2. Types of Returns Explained

a. Nominal Return

• The simplest calculation: what you gain or lose on an investment before accounting for inflation.
• Formula: (Ending Value – Beginning Value) ÷ Beginning Value
• Example: Buy stock at $100, sell at $110 ➔ 10% nominal return.
• Caveat: Can be misleading if inflation is significant, as it doesn't measure actual purchasing power.
• Notable quote:
  • "Nominal returns can be misleading. If inflation ran at 4% during this investment period, your real return, your purchasing power gain, was only about 6%." (03:00)

b. Real Return

• Adjusts for inflation, reflecting actual increase in purchasing power.
• Reiterated from previous episodes: Real Return = real risk free rate + risk premium.
• Importance: Over long periods, even modest inflation rates can eat into what looks like “healthy” returns.

c. Holding Period Return (HPR)

• Measures total gain/loss, including dividends or interest, during the entire period an investment is owned.
• Example: Buy at $100, receive $5 in dividends, sell at $110: (110 - 100 + 5) / 100 = 15%
• Quotes:
  • "Holding period return percentage terms would be 15%, which is 110 minus 100, plus the $5 in dividends, all divided by 100." (04:13)

d. Total Return

• Closely related to HPR; typically expressed as an annual figure, and includes all sources of income (capital gains, dividends, interest).
• In many cases, "total" and "holding period" return are interchangeable, unless comparing across different time frames.

e. Compound Annual Growth Rate (CAGR)

• Smooths out volatility to show what constant annual return would achieve the same result as actual variable returns.
• Useful for comparing investments over different time periods.
• Example: $1 growing to $2 in 7 years ➔ CAGR ≈ 10.41%
• Formula:
  • CAGR = (Ending Value / Beginning Value)^(1/Years) – 1
• Quote:
  • "Making apples to apples comparisons in investments is absolutely critical. A consistent 7% annual rate of return often beats a flashy investment that might gain 20% in one year but lose 10% the next." (09:10)

3. Historical Origins of Return Calculations

Foundations in Ancient Civilizations (07:07)

• Return concepts date back to Babylonian and Egyptian merchants who needed to calculate profits from trading expeditions.

Contributors to Modern Thinking:

• Leonardo Fibonacci: Early compound interest calculations in "Liber Abaci" (1202).
• Johan de Witt: Developed present value calculations in the 17th century.
• Benjamin Franklin: Popularized compound growth in American culture— "Money makes money and the money that money makes, makes money." (08:32)

4. Practical Implications for Investors

• Real returns matter most:
  "When evaluating the performance of your portfolio, you need to look at real returns, not just those nominal returns." (09:37)
• Be wary of marketing: Firms often highlight impressive short-term or nominal numbers while hiding risk, volatility, or fees.
• CAGR for apples-to-apples: Use CAGR to compare investments fairly over time.
• Taxes: Understand after-tax returns vs. pre-tax headline returns.

Notable Quotes & Memorable Moments

• "Nominal returns can be misleading." (03:00)
• "Each return calculation… tells us something different about an investment's performance.” (01:15)
• "Money makes money and the money that money makes, makes money." — Benjamin Franklin, cited by Temte (08:32)
• "Not all returns are created equal and apples to apples comparisons are what you really want to look at." (10:53)

Key Timestamps

• 00:00 — Introduction and episode theme
• 01:10 — Why multiple measurements for returns, analogy to temperature
• 02:06 — Nominal return explained; simple math example
• 03:00 — Pitfall of nominal returns & importance of inflation
• 03:35 — Holding Period Return (HPR) and Total Return explained
• 05:45 — CAGR and smoothing investment volatility
• 07:07 — Historical evolution of return calculations (Babylonians, Fibonacci, de Witt, Franklin)
• 09:10 — Comparing investments with CAGR and real return
• 09:37 — Practical warnings about misleading marketing, fees, and inflation
• 10:53 — Final takeaway: "Apples to apples" for your situation and goals

Wrap-Up

Temte closes the episode by reiterating that understanding the specific type of return presented is fundamental in assessing your investment outcomes. He encourages listeners to look past surface-level numbers, pay attention to inflation and taxes, and always aim for like-for-like comparisons.

Final message:
“Understanding return calculations and distinctions empowers you to ask better questions, make more informed decisions, and avoid being misled by flashy marketing materials that emphasize the most favorable return calculations while ignoring others.” (11:10)