What's a realistic performance target for a private investor?

22nd Apr '15 by WarrantStar

14 comments 13819 reads

Do you have a target as a private investor? What is it? My target is to beat the capital return on the UK all share index by at least 0.1% per trading day (one tenth of one percent). If the all share index remained flat for a whole year, and I beat it by 0.1% per trading day (of which there are about 250), then this would compound to about 28% per year.

I track this by measuring my outperformance / underperformance every day. I then work out the thirty day trailing average of my outperformance and use this as my key performance indicator. How do you track your performance?

Do you meet your target? I don't quite meet mine, but am very dedicated to improving my performance.

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WarrantStar

Premium Member

I am a keen & experienced investor. I love my spread sheets, and like to think that I know what I am doing. I wouldn't be offended to be described as a bit geeky. Mostly I do well, but I always strive to do better. Married male. Born 1957 England. Good career in industry for 35 years. Been successfully investing for about 30 years. I chose to retire from salaried employment at age 57 to look after my investments. I consider myself to be quite analytical / logical / mathematical, but also take into account how the world is likely to change & how people behave. I always follow my processes before taking action. more »

14 comments

AnonymousUser1499

23rd Apr '15

My target is simply to beat the FTSE all share, as if I don't then I should buy a tracker. I've managed this most years and have comfortably outperformed overall. One comment I would make is that an achieved target of 28% a year over a long period would arguably make you a more successful investor than Warren Buffet, so it may be a bit high.

WarrantStar

23rd Apr '15

Hoshibear, Thank you for your comments.
I do have an advantage over Warren Buffet, as do all small private investors. The advantage is that I can buy smaller companies in quantities which are significant enough to affect my portfolio. Warren Buffet has been unable to do that for many years because the amount of money that he is managing ,is massive. I guess it would be interesting to see how he performed many years ago when his portfolio was much smaller.

AnonymousUser1499

24th Apr '15

Hi Warranstar,

Whilst there is truth in the issue of portfolio size, although a nice problem to have of course, 28% a year is still a very high target realistically. You're describing an incredibly valuable skill to be able to do that (or a huge amount of luck), you could grow 15K, without adding another penny, to a value in excess of 7 million in 25 years
Having said that, I believe Warren said in recent years that he could achieve 50% a year if his portfolio was vastly smaller, so who knows. Best of luck.

TheWatchmaker

24th Apr '15

Hi Warranstar - a target of 28% gain per year is very high but I also have a similar 30% target myself. I have managed to over-achieve it over first two years but who knows if it is sustainable - if it is then this would be a fantastic performance right up there with the greatest fund managers. If you read 'The Super Investors of Graham and Doddsville' - you can see that some of the great value fund managers sustained 20% to 30% per annum over long periods. We should have a 'small investor' advantage over these but may not be fortunate enough to have their stock-picking skills.
Outperforming a relevant index is the minimum we should aim for as private investors - if we fail to achieve this then a tracker index fund makes more sense.

What I would say is that targeting 0.1% per trading day is not the way I would approach it. There is simply too much noise at this level and you could just end up chasing this noise. Even a 30 day average of this can be made up of more noise than performance. On a day-by-day basis my returns are completely uncorrelated with the market indexes, even on a monthly basis there is limited correlation.
However, I do monitor on a frequent basis - weekly returns - but it's important how you react to these. If you are too quick to react you will just be chasing the noise. Frequent monitoring is OK provided you can resist the temptation to overtrade in response to noise events. What really matters is long-term outperformance.

By focussing on a concentrated portfolio of small caps there is the opportunity to significantly outperform - and obviously the risk of significant losses.

Keep thinking big - just remember that we shouldn't get too convinced of your abilities yet - it could be mostly luck.

WarrantStar

24th Apr '15

Hi TheWatchmaker
Thank you for your reply. Yes I do have to be careful about over trading. I have done a lot of work on my process for deciding what to buy. My process for deciding what and when to sell is what I am currently working on. Hopefully, when that is better refined, it will also help me to resist over trading. My 30day key performance indicator is currently on track.

cig

24th Apr '15

Investments are like any product, it's a market, in which individuals are price takers. All you can do is try and find the best deal: what is the best price/quality ratio for physical products, what is the best (relative) risk adjusted prospects for investments. Targets do not add value to the process of finding good deals, which is essentially relative.

The sell process is easy if you have a buy process: sell what you wouldn't buy.

WarrantStar

24th Apr '15

Hi Cig
Thank you for your reply. Personally, I do find value in having a target in that:
1) If I consistently fall below it then I will buy a tracker.
2) If I sometimes fall below it shows that I need to improve my processes to stay ahead.
3) If I mostly beat it then I would raise it.

I don't think it is best for me to immediately sell any share that I would no longer buy. I would consider selling it. And I would consider holding it. My buying process is rigorous. So, if I immediately sold any holding which no longer met my buying criteria, then I would be getting too trigger happy and be over trading.

Of course, if you are happy with your processes, then you should stick with them, and give them the occasional tweak

Mechanical Bull

24th Apr '15

I don't see the value of having a target and indeed I think it is counter productive. Returns from the stockmarket tend to be lumpy and there always random factors that effect the specific level of returns, especially over the short term. Even good stock pickers and good strategies go through lean patches and so setting a target can only encourage an investor to think that there is something wrong with an approach that may well be perfectly sound.

The key to successful investing is pretty simple. It basically comes down to methodically deploying a proven approach and being patient. A target won't help with the latter.

WarrantStar

24th Apr '15

Mechanical Bull
Thank you for your reply.
How can I determine whether my proven approach is working extremely well or no longer working satisfactorily? How long should I continue to be patient with poor returns?
A return that is based on £ profit per period (eg month) would obviously be no good because it takes no account of market movement. But I think that a target based upon a comparison with market movement such as the all share index, is rather more useful in seeing how well, or how poorly, I am performing. I am currently using a 30 day period for this, to stop it being too lumpy.

cig

24th Apr '15

Yes you want to avoid excessive flip flops, which is no problem with the "sell what you wouldn't buy" strategy: you add a bit of hysteresis, that is same rigorous process, just with more tolerant margins/parameters on the sell side. Like a thermostat.

Mechanical Bull

27th Apr '15

I agree that monitoring returns against an index makes sense. However, thirty days is no where near long enough to evaluate whether an investment approach works over the long term.

Peter Lynch emphasises the importance of evaluating strategies over long time scales, upwards of fifty years. Joel Greenblatt similarly makes that point that Magic Formula investing can underperform for several years. Value investing more generally is based on the idea that the market will eventually recognise undervalued stocks, which then drives capital growth. However, value investors can't control when this happens, so they simply have to wait - typically, several years.

Shorter term monitoring might be useful for momentum strategies, but even here 30 days is way too short. I don't have the reference, but I remember reading an academic paper that suggests that 1m relative price strength (RS) tends to be inversely correlated to returns, although it it does work for periods of 6-months to a year 1 year. However, momentum strategies tend to suffer in bear markets.

So yes, you can monitor returns against an index and this will tell you how well you are performing over 30 days, or indeed any time period. But I very much doubt whether it is going to give you meaningful feedback on whether you should change what are doing. I think it is better to follow proven strategies that have the best chance of performing over the longer term, than taking much notice of what has happened to the markets over the past month.

To answer your question directly, I think most investors need to be prepared for periods of sub-par performance for up to several years. particularly if the market has just undergone a major correction.

TheWatchmaker

27th Apr '15

Hi,

In response to :
'this will tell you how well you are performing over 30 days, or indeed any time period. But I very much doubt whether it is going to give you meaningful feedback on whether you should change what are doing.'

Agreed, 30 days is too short a period to give meaningful feedback on performance. However, you also quote :

'Peter Lynch emphasises the importance of evaluating strategies over long time scales, upwards of fifty years'

This is no magic bullet either - it might well give a more meaningful answer to whether an approach is working - but it is a useless time-scale for revising your approach - this feedback loop is simply too long.

So, we need to find happy medium. For those of us new to investing, waiting multiple years is not always an option before we realise it's all going wrong. This can be quite a dilemma, react too soon and abandon a potentially successful strategy - or stick to your guns to find out it doesn't work in 5 - 10 years time.

In my opinion, the only realistic option is to work with imperfect short-term feedback and combine with more medium-term multi-year feedback as your market experience expands.

UK Value Investor

28th Apr '15

I track returns against the FTSE All-Share and expect to beat it, otherwise I should just buy a tracker. I'm just as concerned about income and risk as total return so my portfolio goals are:

1) Have a higher yield than the All-Share
2) Beat the All-Share total return over 5-years
3) Be less volatile than the All-Share
4) Produce annualised returns of at least 7% over any 5-year period

I added the last goal as an absolute return goal rather than relative because I didn't want to jump with joy by beating the market if the market hadn't gone anywhere for years (e.g. the FTSE 100 between 2000 and 2015).

I guess those goals are fairly common, but it's a good idea to have them written down so that you know what you're aiming at.

Velo

28th Apr '15

Reported by Reuters:

"The Voya Corporate Leaders Trust Fund, now run by a unit of Voya Financial Inc bought equal amounts of stock in 30 major U.S. corporations in 1935 and hasn't picked a new stock since.

Some of its holdings are unchanged, including DuPont, General Electric, Procter & Gamble and Union Pacific. Others were spun off from or acquired from original components, including Berkshire Hathaway (successor to the Atchison Topeka and Santa Fe Railway); CBS (acquired by Westinghouse Electric and renamed); and Honeywell (which bought Allied Chemical and Dye). Some are just gone, including the Pennsylvania Railroad Co. and American Can. Twenty-one stocks remain in the fund.

The plan is simple, and the results have been good. Light on banks and heavy on industrials and energy, the fund has beaten 98 percent of its peers, known as large value funds, over both the past five and ten years, according to Morningstar.

...He said the Voya fund's strategy can be better than an index fund because it doesn't have to change its weightings when the index changes..."

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WarrantStar

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