A Short Story to tell why You shouldn’t Compare Your Portfolio Returns with Index Returns

There is a general trend to compare your portfolio returns with returns of popular indices like Sensex and Nifty. And this is not a recent phenomenon. It has been going on since years. Ask anyone and they will tell you that their portfolios have beaten Sensex by 5% or 10% year on year.

Here is a short but interesting story about why it doesn’t make much sense to do it:

Years back, there was a man searching for something under a streetlight. A policeman comes by and asks what he’s lost. The man replies that his keys are missing and he can’t get back into his house.

After a few minutes searching together, the policeman inquires whether the man is sure he lost his keys under the lamp.

No, the man replies, he lost them in the park.

“Then why are we searching here?” exclaims the officer.

“This is where the light is,” replies the man, continuing to search.

Story Investing Street Lights

That is the end of the story. Can’t get it?

Don’t worry. Read further…

The problem with evaluating relative performances is that you can’t get much out of relativity, i.e. you can’t eat relative performance. And the biggest problem with relative performances is that it ignores what an investor actually needs? Some investors invest for growth. Others might invest for generating dividend income. And many like me invest for a combination of the two. 

And comparing short term relative performances when you are investing for longer time horizons like 5 or more years does not make much sense.

And an index is not designed keeping in mind an individual investor’s needs. Remember that. So if you are comparing your portfolio performance with that of an index, then remember that index does not know that you use it (and not your actual needs) to judge your portfolio performance.

So if you really want to find your lost keys, you need to look where you’ve lost them, not where the light is (index performance). And if you want to know how your portfolio is doing, compare it to your actual needs and not any arbitrary index.

Note 1 – The idea for this post is sourced from here.

Note 2 – If you want  to read another interesting story about monkeys & goats and what they tell about stock markets, then you can read it here.

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Year End Report (2012) on Stocks we wrote about & our Personal Portfolio

We wrote a number of stock specific articles in 2012. Below is a table about how they have done since we last published about them.

2012 Stock Returns
As the table suggests, we got it right almost 81% of the time this year. 🙂 Lucky us…
The articles on above mentioned stocks can be accessed here: HUL, Cairn India, ONGCor Others.

Personal Portfolio

Our personal portfolio has gained approximately 11% (13% including dividends) in 2012. This seems disastrous when compared to Sensex returns of 25%+. But since most of the stocks were bought in second half of 2012, the results aren’t entirely comparable. By the way, Sensex gave 11.6% in second half of 2012. But if you still feel otherwise, then you have the right to do so because the numbers are against us…
By the way, as a disclaimer, we would like to share names of stocks we hold in our personal portfolios. We are long on all of them (except 1) and are ready to hold them for next 10+ years.

Stocks (Long Term Investments): Axis Bank, ONGC, Balmer Lawrie, Cairn India, BHEL, Clariant Chemicals, Tata Investments, IOCL, L&T Financial Holdings, Novartis India.

Stocks (Medium Term): Thangamayil Jewellery

We would be glad to buy any of the above mentioned stocks at lower prices. So as 2013 approaches and with most experts expecting a bull run, we presume we are among the very few who hope (& pray) for a correction… 🙂

Have a happy new year everybody!


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Stock Portfolio Performance – Update 1

This is an update on price performances of stocks suggested for Dead Monk’s Portfolio.
 
It’s been 3 months since we came up with a list of 15 stocks to hold for long term.  Though 3 months is nothing when talking of long term, we anyways decided to see how individual stocks are doing and if any one demands any special attention.
 
Note- Cyclicals & Misc. are not a part of the Core Portfolio. They are not to be held for long term.
So after 3 months, are we still interested in stocks we suggested initially? Yes we are. But we would also confess that a few other stocks in our watchlist, are keeping us interested.  🙂 As of now, we don’t know if we would use them to replace a few stocks in Dead Monk’s Portfolio. At present, we prefer to keep our portfolio as it is.
Please note that we are just checking price performance (& not stock fundamentals) in this update.
 
And before you decide or even think of buying any of these stocks, we request you do your own analysis.