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photo © 2009 Iman Mosaad | more info (via: Wylio)
I would like to talk about investment performance. Ever thought of beating investment pros in their game?
You don’t really don’t need to do anything.
I’ll tell you why.
If you look at the long-term performance of fund managers, you’ll be very disgusted. Only a handful of investment managers could beat the market. I could now hear the disciples of index funds cheering on.
What’s the reason why the underperform of most funds managers? It’s not that they lack the intelligence or skill to find the winners in the market. In fact, these fund managers employ army of analysts with CFA’s and Phd’s attached on their names.
These army of analysts look at investments to buy or sell everyday. The irony is that the fund underperforms the market despite these tools.
The reason is not intelligence or skill. The reason is how the fund operates. The typical set up is that every week, an investment commitee discusses the portfolio.
A stock portfolio that underperforms in the short run doesn’t look good. It would cause some doubts on the ability of the fund manager. The tendency is that the losing stocks will be sold and the winning stocks will be bought.
Talk about selling low and buying high.
That’s why a small investor has an enormous advantage over the big investors. They are not tied up to weekly, monthly and yearly monitoring.
If you’re a professional fund manager, you can’t afford a losing year. It would definitely cost you your job.
How should an investor look at performance? On a multi-year and absolute basis.
Why bother complaining if you have underperformed the market this year when you have outperformed the market for the past 5 years?
I believe this applies to those who are value-seekers. People buying cheap stocks should not expect their stocks to realize their value in months or in a year. After all, businesses changes in terms of years not by months.
On another note, I look at my performance on an absolute basis. I don’t really look at the market’s performance and compare it to my own.
Suppose the market is down 20%, you wouldn’t be happy if you’re down by just 10%. You still have beaten the market, but in reality you’re portfolio is no better than the market.
I know it’s difficult to wait for 5 years before your gains will be realized. However, the stock market is built like that. Money flows from the impatient to the patient.
Trust me, patience is your ticket to multi-year baggers. My advice is to stop looking at stock prices on a daily basis. It’s noise. Look at long-term business fundamentals instead.
Kick the habit off and you will be on your way to modest gains in the market.
How about you? Do you have the habit of looking at stock prices every minute? Do you kick yourself for underperforming this month?
