Comparing your performance

Comparing performace of 2 investment portfolios is not a matter of comparing 2 numbers. In this message I would describe what factors you should consider before comparing performance of your portfolio with anybody else's.

1. Performance of a portfolio on paper(on one web) is not comparable to the performance of your invested money. Many members have said that they were following the portfolio on paper. Paper portfolios are waste of time and create illusion of learning. This is because the two important psychological factors, fear and greed are absent when you operate without money.

2. Performance can be compared on equal timeframes. If you have beaten Sensex this year, it not a reason to be happy. Similarly if you failed to beat it(like me) you don't need to worried.

3. Performances on short time frames(less than 3 years) are not worth comparing.
[By my estimates, next 3 years be a disappointing for all those who are investing today by selecting top performing mutual funds. ]

4. Performances on dissimilar investing styles are not comparable. You can not compare value investing based portfolios with growth oriented portfolios. Similarly comparisons in mid cap vs. large caps, focused vs. diversified portfolios are equally meaningless. Each of these have different risk associated with them which doesn't show up in `Top 10' lists.

5. Performance which don't take into account the short term capital gain tax and brokerages are a delusion. Similarly for mutual fund investors what matters is the returns after subtracting loads/expenses. This factor alone makes indices difficult benchmark to beat because the indices are long term portfolios and have no fee(or minimal fee charged by ETF)

While ending this experiment I'm not proud because it gave 53% p.a returns. I'm proud because I got those returns by following my investment philosophy. This gives me confidence that I can reasonably hope to continue getting above average returns in future.

In investing the determining factor your maturity aren't your returns. Its your investment philosophy. Returns are byproducts of how you think. For new investors I think its OK to loose money on the way towards figuring out your investment philosophy. For mature investors its OK to under perform the markets in short/medium terms as long as you are following your investment philosophy(see Buffett's relatively poor performance in 1997-2000 period).

Hence I should extend my congratulations to all the members who didn't get good returns while following their well thought investment philosophy. We are all running a life time marathon. If you are right then the time will prove you right. If you are throwing darts then the laws of probability will catch up with you, sooner or later.

Posted: Apr 23, 2006

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