After doing my ‘Scores on the Doors’ Blog for 2017 and seeing all the excellent Results that people have achieved on Twitter, it seems timely for me to bash out this Blog and try to put some context around the Returns that have been made and how we should best regard them in relation to our own achievements.
Boiled down to its smelly chicken bones, my contention is that we need to be dead careful when comparing our own Results with those achieved by others - on the positive side they can inspire us to do better but on the negative side they can give us some pretty disheartening and deflating impressions that are probably false and unrealistic.
Yes, to a large extent this is maybe yet another Psychology Blog…….
Why comparisons with others are possibly invalid and dangerous
There are a myriad of reasons why doing simple ‘bare bones’ comparisons with others is probably a mistake. As an example, let’s say you did a 14% Return for Last Year and when you work out this Figure you are pretty happy (as you should be !!) - but then it all goes to pot when you look on Twitter and you see people making 34%, 56%, 27%, 42% etc. etc. - and all of a sudden you feel pretty useless and feeble.
But of course this is silly - 14% in the context of Actual Gains that are achieved Year in, Year out, is a very high figure - and of course it is very possible that the People reporting these superb Numbers on Twitter are not managing to produce this over a sustained period - and even if they are, for reasons I will come onto in a bit, they are probably doing things in a very different manner to what you are. When you look at the ‘Big Picture’ and realise how strong a 14% Gain is (for instance, Warren Buffett probably achieves around 20% a Year Compound Annual Growth Rate [CAGR] and Robbie Burns, The Naked Trader, maybe 25% a Year CAGR - and these are probably 2 of the very best out there), it should be obvious that you have done really well and you should be very proud of what you have achieved.
As ever, we can always do better and instead of beating yourself up and getting peed off, you should give yourself a little Pat on the Back (no, not a Cow Pat !!) and then focus on thinking about what you did well, what you did not so well, and how you are going to tweak your Approach to try to do even better in the future. That is a positive way of moving forwards, and it is an essential Outlook for Investors / Traders to be Realistically Optimistic - it certainly does not pay to be a Pessimist in this game.
As I tend to do with many of my Blogs recently, I have put a link at the bottom of this one to the Infamous ‘Power of Compounding’ Blog - look at the Table in it for a 14% Return and you will see just how strong such a Return is and you need to focus on getting consistent at achieving such decent Gains.
Here are some reasons why Comparisons could be unhelpful:
High Level Approach:
Personal Risk Levels:
That’s turned out a pretty meaty list and it follows that Comparisons need to be used carefully. However, it doesn’t really make sense to just do our own thing in isolation - it can certainly be helpful to do some element of Benchmarking and Comparison - so what can we do?
Set yourself a Realistic and Sensible Target
In the earlier Example I gave, under ‘Proximity to Retirement’, in the Years up to 50 a Target of perhaps 20% a Year would be appropriate and then in the latter Years, a Target dropping to 10% a Year might be about right.
I myself target 10% a Year Returns - this is a good compromise between something that is Realistic and Achievable but also it is not so crazily high that it will induce me to make silly errors and to over-trade and try too hard. To achieve High Returns it is the counterpart that you need to take on Higher Levels of Risk and Volatility - you need to find a balance that is comfortable for your needs.
I suspect many Traders would actually make more Money if they were to Trade less and let their ‘Winners’ run - I think Patience is a hugely important part of our Investing/Trading skillset and it is not an easy thing to take advantage of - naturally we want to over-trade.
I cannot stress enough how important it is that you enjoy your Investing/Trading - I take the view that if I focus on trying to get my Stock Picks good and getting my timing decent enough, then I will make Money as a consequence. I enjoy the process of hunting out Good Stocks and stalking them for a buy and all the almost countless actions that I need to go through every day - it is what I want to be doing and I am very happy ‘living’ this way - the Money is very much secondary. As such, I don’t get overly hung up on the Returns I make as long as they are decent enough - I am always trying to get better and better and that is the challenge of what we do. If I was unable to make sufficient Returns, I have no idea what I would do with my time - I would probably be quite bored.
Use an Index to Benchmark against
One method you might like is to compare your performance against an Index or perhaps a sort of ‘Hybrid’ Index that you create yourself. If you look at the start of any of my ‘Scores on the Doors’ Blogs (there is a Category for these on the Blog Page), then you will see a short list of Major Indexes that I always work out the Return on each year - and this gives me some sort of sense of how I have managed to perform for the year - but I don’t get overly hung up on whether or not I have beaten a particular Index.
Obviously you need to use an Index that bears some relationship to what you hold in your Portfolio - for myself with a wide mix of Market Cap sizes etc., perhaps the FTSE All-Share Index is the most suitable. Taking it to an extreme, there is no point comparing your Performance to that of the Japanese NIKKEI 225 if you only invest in the UK !!
As I mentioned elsewhere though, even if the Indexes did regularly beat me (and therefore I could in theory do better just by buying an Index Tracker Fund), I would probably still carry on doing what I do because I enjoy doing it.
Find Appropriate People to compare your Performance to
As I mentioned in the ‘Horses for Courses’ bit earlier in this Blog, there can be some degree of validity of Comparing your Returns to somebody else providing that their Approach is very similar to yours and also if you are able to really understand in detail how they do things (maybe it is a good mate and you can discuss approaches over a Beer to ascertain how much you differ), then you can make allowances for the small differences that there are.
However, there is certainly a need to be careful. If you have Mates with a very similar Mindset / Approach, then interaction with them regarding your Stocks, potential Stocks and how you do things etc. can be extremely useful and a highly enjoyable and beneficial antidote to the isolation that is sometimes part and parcel of Investing / Trading. On the flipside though, you must be on your guard because it is so easy to fall for superb ideas that your Mates have and to make some nasty and expensive errors as a result. As always, any Stock you come across must be treated as merely the germ of a Potential Investment idea and you must slowly and carefully scrutinise it and think objectively about whether or not it will make you money or be a total screw-up. It is also worth determining how well it would ‘fit’ in your existing Portfolio - what would this Potential New Stock bring to your Portfolio Party?
There are some unfortunate Psychological Biases that we all possess which can mean that our Mates (‘Peers’) influence our thinking much more than we realise and factors like the ‘Halo Effect’ can have a similar negative impact on us when we are choosing what Stocks we want to invest in. We all want to fit in and be part of a Gang - this kind of ‘Herding’ can lead us to costly mistakes and another danger arises from the ‘Fear of Missing Out’ (FOMO) when all of our Mates are invested up to the Eyeballs in the latest Hot-Shot CryptoCurrency piece of Junk…..
If you are not in a situation where you have lots of Mates who live locally and who you can frequent the PUB with, then make use of the superb tool that Twitter is and make friends this way. In my limited time on Twitter I am amazed how useful it is for finding like-minded People with very similar Approaches and Mindsets and it is well worth cultivating such relationships. On the whole the Investing Community is extremely friendly and we all love discussing our latest obsessions. You can also bump into other Investors at Shows and Investor Events which regularly take place and also things like Share Clubs can be a useful way of interacting with other like-minded people.
It makes sense to view the Performance of Others with a high degree of Objectivity and appreciation of the considerable differences in Approach etc. which can create such a variation from how you have done for the Year. When you see that someone else has had an incredibly strong Performance and utterly left your Numbers for dead, rather than getting upset and suicidal, think about what they do that is different and look upon their Success as an inspiration for what can be achieved but bear in mind that their apparently ‘Better’ Performance has probably come at a Price in terms of aspects such as Risk Level, Overall Approach, Time needed, Types of Investments etc., that might be compromises that you are not prepared to, or able to, make.
In terms of your own Approach, if you have a basically sound method but you can see room for improvement, then make sure any changes are carefully thought through and rather than totally throwing your Approach up in the air and starting again (although for some Newer Investors / Traders this might be exactly what you need to do), undertake small incremental changes and constantly monitor whether or not these alterations are working or perhaps even hindering your Performance. This is by no means a ‘Seat of the Pants’ activity and combating the Markets on a Daily basis is very much a Serious Business.
On the opposite side of this, if you have done better than someone else, don’t think you are God’s Gift to the Trading World or any such silliness - thank your lucky stars that you have had a good Year and if people ask for suggestions on how they can improve their Returns then offer any suggestions that you think helped your Performance and are the essence of how you do things. The minute you start getting Cocky and Over-confident, the Markets will kick you so hard you won’t be able to sit down for months.
So, in summary, rather than obsessively comparing your Performance to other People where the limitations are considerable, it is far better that you focus your efforts on being the Best Version of You that you can be and to keep striving for improvement and being better at the challenge presented to you by the Markets.
The Compounding one:
The ADVFN App and End of Day Numbers one:
‘Monkey with a Pin’ blogs - all about how we manage a Portfolio:
In case you haven’t fully experienced the dark and surreal recesses of the WheelieBrain, have a go at reading this rather bizarre set of Blogs (don‘t worry, I have since taken my medication so it is safe to come out now):
I’ve written a fair bit on Psychology but the Blogs here (there are links to earlier Parts) are probably the best to read:
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