Landbanking Firm’s High Return?
A landbanking firm placed a half page advertisement on the 25th July 2010 edition of The Sunday Times. In the advert, a 28.24% average rate of return was reported. The figure was even reported to be audited by a large audit firm.
Average rate of return is not the standard way investment return is reported. Normally, investment return is reported using Compounded Annual Return (Compounded Annual Growth Rate, CAGR) or a.k.a Geometrical Return. The average rate of return is the Simple Average of the returns.
I check out the report on their website and the Compounded Annual Return is 14.82%, only half of the reported 28.24% average rate of return.
A Geometrical Return will never be higher than the Simple Average. A simple example – An investment gave a 100% return in year 1 and drop 50% in year 2. What is the Simple Average Return and Geometrical Return? Ans:
Simple Average Return – 25% p.a.
Geometrical Return – 0% p.a.
I find it misleading to report the Simple Average return while the Geometrical Return is available. Even the report state that the “compound rate of return is more commonly used in Canada“. But hey, landbanking is not regulated anyway. So we should not be surprised at the non-standard way of reporting investment return.