Measuring Return - Factoring VIP points

LEtsGO · 2015-03-31T17:00:14.000Z

An essential part of investing is measuring your return - otherwise how do you know that it's worth the effort?! I prefer to use Rate of Return as a standardized metric (XIRR in Excel) over the likes of CAGR or any other measure. I am of the mind that my return should based on the difference between what I actually paid for the set and what I actually sell the set for including all fees, taxes, shipping costs, and so on. One factor I was unsure of is how to take into account VIP points. I have found numerous threads and posts which make it plain that each person has their own way of considering VIP points and if/how/when they should be included. As I say, I think the return should be based on the difference between what I paid for the set and what I sell the set for including all fees, taxes, shipping costs etc. The problem with VIP points is that their benefit is deferred. i.e. you earn them on the purchase of one set but can't 'spend' them until you purchase your next set. This can lead to an artificially low purchase price on the second set and hence an artificially high rate of return which doesn't truly reflect the value of the investment. To illustrate with an example; (pedants, please bite your tongue! The example is simplified with prices rounded, taxes ignored etc. to illustrate a point. I am not looking for comment on the realism of my example, it's just an illustration!) Say I bought a Death Star for 400USD and accrued 400 VIP points (equivalent to a $20 reward off my next purchase). I then buy a Delorean with $40 RRP but I use my VIP points to reduce the purchase price to $20. Assume I am able to get a final sale price for both items equivalent to RRP; the Death Star makes 0% return and the Delorean makes 50% gain (CAGR for simplicity). This is clearly misleading as the Delorean hasn't doubled it's value so isn't as hot investment as the numbers suggest. So as an alternative strategy, I played around with assigning the VIP points earned by the set, to the set, having an purchase price lower than I actually paid. i.e. the Death Star would effectively have a purchase price of 380USD (400USD-20USD from VIP points), despite me physically paying 400USD. Although this may give a truer return for the Death Star, the problem is then merely shifted to the next set where the VIP points are actually used. So using the same theory, the Delorean with a RRP of 40USD should accrue me 40 VIP points, but in reality I am using the Death Star VIP points to lower the purchase price to $20. And herein lies the problem as I will now only earn 20 VIP points instead of 40. So when I assign the 'VIP self earned reward' to the Delorean purchase price, it is really half of what it would be had I not used any VIP points. Again, this is misleading since the Delorean should be discounted $2 (40 points) instead of $1 (20 points). (I know in reality it has to be 100 point multiples to be redeemed). The third strategy has brought me full circle, and goes back to simply measuring the difference between what was actually paid for the set and what the set was sold for and taking a step back to look at my portfolio as a whole. The logic behind this is that the purchase price of the set can vary based on a whole range of factors such as geographically where you buy it (influencing how much tax you pay), if it's on promotion/sale, the current cash back rate through 3rd party sites, retailer specific vouchers/promotions, and so on. A lot of these are independent variables not related to the fundamental value of the set and so also skew the rate of return as an indicator of how prudent the set was an investment. And as savvy investors, we all strive to purchase desired sets at the lowest price possible, making use of all resources available - including VIP points. To some extent which set made the return is irrelevant as if you are an investor, the only thing that matters is your total return - you don't necessarily care where it comes from. But, I see there is some value in accurately tracking returns on specific sets in order to identify trends such as which themes, set sizes and other distinguishing factors are most profitable, perhaps in order to focus future investment (standard investing disclaimer: past performance is not an indicator of future performance!) In conclusion, my current mindset - which I have become more comfortable with through writing this post - is that actual purchase price (i.e. money out of my account) compared to actual sale price (i.e. money that makes it back into my account) is the best way to track and measure return of my portfolio as a whole. It is meaningless to try to take into account factors such as VIP points on a set by set level since these discounts are independent of the specific set. They should however be included in the overall return calculation - and the easiest way to do this is by recording actual price paid for each set. So in my example above, I would have spent 420 USD on Lego (400+2