To Compare or Not to Compare

Few days back, I was analyzing my portfolio’s performance in 2015. Though I haven’t fixed an exact date for this annual exercise, I generally do it either in last week of December or first week of January.

Comparing Stock Portfolios

So once I was through with the exercise, I felt that considering it was a negative year for indices, my portfolio giving positive returns was good enough. I felt moderately happy.
Then I happened to have a chat with a friend who is also quite passionate about markets.
His portfolio did far better than mine. Infact his knack of getting in and out of markets regularly in 2015, resulted in him doing almost 10% better than me.
Now I was not as happy as I was before talking to him. 🙂
Its natural. I am a human.
Even though I was happy that previous year gave me some good opportunities to buy shares of good companies, somewhere inside me I had a feeling that I too would have loved to see my portfolio doing better than what I actually managed in 2015.
I know that it sounds like having the cake and eating it too. But this is what I felt. Nevertheless, I know one thing. It is not possible to beat the markets and everyone, every year.
Even Buffett can’t do it.
So why should I be bothered about doing better than everyone else?
As long as the average CAGR of my overall portfolio (MF+Equity) remains in line with my low expectations (which means I need to invest more every month and I am happy doing it), I should be a satisfied person.
I came across some contextually relevant lines while reading the 1990 Memo by Howard Marks (I planto read all available ones this year), where he said something that was comforting:
There will always be cases and years in which, when all goes right, those who take on more risk will do better than we do. In the long run, however, I feel strongly that seeking relative performance which is just a little bit above average on a consistent basis – with protection against poor absolute results in tough times — will prove more effective than “swinging for the fences.”
This made perfect sense to me. I am a firm believer of protecting the downside. Infact my bias toward Return OF Capital is so much more than Return ON Capital, that I regularly pass interesting but riskier opportunities.
As investors, we grossly underestimate the power having slightly-better-than-average performance over long periods. And as Marks say:
I feel strongly that attempting to achieve a superior long-term record by stringing together a run of top-decile years is unlikely to succeed. Rather, striving to do a little better than average every year – and through discipline to have highly superior relative results in bad times – is:
  • less likely to produce extreme volatility,
  • less likely to produce huge losses which can’t be recouped and, most importantly,
  • more likely to work (given the fact that all of us are only human).

Now when I say that I regularly pass riskier opportunities, it is because it would have required me to stick my neck out of my area of understanding (called circle of competence) and increase the chance of not knowing what to do if things did not fare as I expected them to. So it’s still possible that I might have had a better performance last year if I had taken those riskier bets.

But as Marks puts it, that bold steps taken in pursuit of great performance can just as easily be wrong as right. Even worse, a combination of far above average and far below average years can lead to a long-term record which is characterized by volatility and mediocrity.
Reading this memo clearly shows why there is no point in playing the comparison game. Being young, a 12% average return over the next 3 decades might be enough for me. For somebody else, even a 18% return might not be enough or satisfying or both. So as long as I don’t take too many risks and limit my direct equity investments to only high-conviction ones, I am sure that I will do just fine. 🙂
The best foundation for above-average long-term performance is an absence of disasters. I know all this sounds good in theory but is difficult in practice. But it is the truth and the reason why good investors do well.

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