Compare at your Peril

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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:

• Bare-Bones Approach - Some people are very much ‘Traders’ who use Technical Analysis and various ‘Trader Tricks’ like Stoplosses and Pyramiding Up and suchlike - many take very little notice of Fundamentals on a Stock. Other people are Fundamentals-only Investors (I never understand this as the Charting elements can be so useful) and then another type are more like me - I tend to select Stocks on Fundamentals of the Business and then I use Technical Analysis stuff to help with my timing of Buys and Sells etc. and I take a lot of notice of Risk Management techniques and Psychology (both in myself and of other Market Participants).
• Horses for Courses (don’t panic, I am not about to lose it and go all nuts like I did on that Horseracing Analogy Blog !!!) - it is essential that you tackle the Markets in a manner which is suitable to your own psychological make-up and your actual Skills and time available among other things. For example, due to my Health challenges and my sheer utter laziness, I am not one for Trading in and out of Positions and the last thing I want to be doing is looking at a Screen all day - I want to be down the PUB and if ‘work’ must be done then it will be discussing various aspects of particular Stocks and Investing techniques over a pint of Old Speckled Peculiar Chicken. However, other people might find going to the PUB far too enjoyable and they see the peak of life’s excitements being to sit with their nose glued to their PC screen looking at Numbers changing rapidly and lots of lights flashing on and off and suchlike - each to their own. If you are someone who sees themselves as a ‘Trader’ then you need to be entirely comfortable with the idea of using Stoplosses and be able to accept that you will have runs of frustrating periods when everything you touch gets ‘Stopped Out’ - that is normal but it is part and parcel of that Approach and you must be suited to it psychologically. Of course the serious point here is that pretty much everybody has a different way of doing things - there might be some very closely similar Approaches used by people and it makes sense to be attuned to how these People do things and the Returns they make if you want to make a Comparison with your own Returns and Methods but if Approaches are wildly different then it is pointless to compare. Don’t get all depressed when you ‘only’ achieve 9% in a given Year but your mate has done 244% by Day Trading - this is just not a remotely plausible Comparison and the simple fact is you have a demanding Full Time Job and a demanding Spouse and demanding Kids, a demanding Pet Collection, and demanding In-Laws etc. etc. etc. - you can only sensibly engage with the Markets in a way that suits your own Lifestyle and Personality. It is essential that you feel ‘comfortable’ with how you do things, if not, it is almost 100% certain that you will fail.
• Fascination / Addiction to the Markets - Some people simply adore the Markets and just can’t get enough of it. They spend all their Waking Hours reading about the Markets and watching their Screen and talking to mates about the Markets and all that sort of thing. OK, to an extent I am a bit like this although I can switch off when I need to. It could well be that actually you are not that enamoured by the Markets or maybe your other Lifestyle Demands do not enable you to indulge your Passion as much as you would like - so it is clear that comparing yourself to a 100% full on Addict is perhaps not an ideal comparison - they are most likely going to do better than you simply because that is all they do with their Life. Be warned, this is probably not a healthy obsession !!

Personal Risk Levels:

• Personal Attitude to Risk - The People you are comparing yourself to could have very different Psychological attitudes to Risk than you do. For example, you might hate the idea of Jumping off Tower Bridge on a piece of Elastic whereas a Person achieving very high Returns might be someone who lives on a Bungee Cord and even trades on their Fone while gyrating up and down over The Thames (don’t try this at home and please don’t try to sue me……). This can manifest itself in that you might be comfortable owning Big Megacap FTSE100 Stocks with chunky Dividend Yields whereas the Person who you are comparing to might own a small Portfolio of AIM Mining Stocks - the comparison obviously makes no sense. 
• Size of Portfolio - in particular the Number of Stocks. It is a simple fact that a Portfolio with a smaller Number of Positions will perform collectively in a much more Volatile (Choppy) way than a Portfolio with loads of Positions. The way things work in the Real World is that if you have a Portfolio of perhaps 15 Shares, then you could achieve much higher Returns than a Portfolio of 50 Shares but the Swings to the Upside and the Downside will be much larger - so in the ‘theoretical’ Academic speak, People who are prepared to take the Risk of a more Volatile Portfolio are Rewarded by a Higher Overall Return - A Risk Premium. Of course the catch here is obvious - if you get higher Volatility then when the Bear grabs hold of the Markets with both Claws, someone with a more Focused Portfolio could really go through squeaky-bum time. If you like Sleeping, then don’t have a Focused Portfolio and don’t use Leverage much if at all.
• Leverage - as I just mentioned Leverage, it seems fitting to cover it in this next Bullet Point (don’t worry, I am not going to Shoot you - this is not Eastenders you know). One of the reasons I hold quite a lot of Positions (at least 40 in my Trading ISA and another 12 in my Income Portfolio etc. - see my ‘Portfolios‘ page) is because I don’t want high Volatility because the method I use to capture a ‘Risk Premium’ is to use Leverage via Spreadbets by ‘Mirroring’ my normal Share Portfolios - this in effect enables a much higher Return than a pure 50 Stock Portfolio or whatever size but in a way that controls Risk very well - as long as you understand and control your Exposure to the Markets. If you tried a similar Mirroring trick with a Small Portfolio of maybe 15 Positions, you would probably find swings far too wild and choppy and this would mean you would need to hold a lot of Cash to ‘back’ your Spreadbet Portfolio.
• Human Capital - I ‘retired’ from Full Time Work 8 years ago now (that is unreal !!) and due to my Health situation (I am a Paraplegic Wheelchair User), I do not consider myself to have much in terms of ‘Human Capital’ - in other words if I screw up with my Investing by taking on too much Risk and I get myself in serious bother, then I do not have the ability to go back to Work and, more to the point, I wouldn’t want to get a ‘Real’ job ever again - it does not appeal in any way shape or form after so many years of ‘Being my own Boss’. So, at the ripe Old Age of 53, what I nearly am, it would be daft to compare myself to a fit, young and dynamic 28 year old who can take a lot more Risk than I can because they could have almost 40 Years of work ahead of them to make up for any almighty balls ups.
• Proximity to Retirement - Let’s say you intend to retire at 55, on this basis, it could be that you take on more Risk from when you are 30 and you work with a Focused Portfolio with just 15 Stocks so that you can get higher Returns and you are relying on the fact that you have many Years of Work ahead of you (most likely), and if you screw up you can work longer and/or save more and suchlike. If we then assume that over the next 20 years everything works out well for you and you are still on track to retire at 55, you might then decide that you are now less comfortable with the Risk Level you are taking and perhaps you have done so well that your Pot is now massive in £ Note terms and it would be impossible to be able to buy enough of a Small Stock to make it feasible - so you are forced to hold more Positions and in effect you lower your Risk Level. So, bearing this transition in mind, it is pretty obvious that in your Years up to 50 you should be ‘comparing’ yourself to a certain type of Investor/Trader with a similar Approach and when you get over 50, you need to compare yourself to someone quite different - so the complexities are obvious.
• Other Sources of Income - it could be that someone has a Partner with a really High Paid Job that they enjoy and this is in effect subsidising the Lifestyle and Investing Approach of someone taking on the Markets. In this case if you compare yourself to this person it might again be pretty invalid as their Return requirements and psychological pressures to perform in a particular way could be very different. There are many ways people have Secondary Incomes (e.g. from a Rental Property) which mean they can approach the Markets in a different way and with different impacts on their psychology.

Other Factors:

• Transparency of Holdings - It is worth bearing in mind that although lots of People post on Tweets and suchlike, there are only really a Subset where you can actually see in detail what they Buy and at what Price and when they Buy it and in what quantities - without this kind of Information comparisons are going to be skewed. It is also worth bearing in mind that you don’t actually know how they are calculating their Returns - it may seem simple and obvious how to do such calculations but you’d be amazed how bad people are at Percentages and I would not be surprised if there are some very dodgy mathematicians out there !! I am pretty sure I explained how I calculate my Numbers in a Blog - I will put a Link at the bottom of this Blog.
• ‘Type’ of Stocks - Stock Selection varies hugely between people and much has to do with attitudes to Risk and the perceived/expected Volatility but also we all have our own personal biases for or against certain types of Stocks. For example, just today on the Tweets my mate @SmallCappy was telling me how he avoids Recruitment Stocks and Retailers, whereas I am quite happy to delve into both those Sectors but of course they both carry Cyclical Risk in particular as well as the High Street being a ‘Killing Zone’ for Retail Groups at the moment. I tend to avoid anything Loss Making although if something is very close to producing a Profit and generating Cash I might be tempted in but this is very unusual. Other People only buy stuff that I would never dream of going near - and they do very well but of course they are often buying with more of a ‘Trading’ mindset and very much for fast, sizeable, Profits before getting out - it’s a very different Game to the one I am playing. There are so many ways of categorising Stocks - such concepts as Growth, Value, Income, Cyclical, Momentum, Defensive etc. etc. - again some people tend to focus on Growth or Value and some even just have very much an Income focused Portfolio - I tend to have a mix of all these things as I see it as another variation on Diversification and Risk Management. But the point is clear, we all have very different Stocks in our Portfolios and this no doubt ensures that direct comparisons of overall performance can only have a certain validity.
• Portfolio Mismatch - This is something that always intrigues me and I remember addressing it directly in a Blog probably years ago now when I was talking about a ‘Monkey with a Pin’. The easiest way to show what I mean here is to talk about my mate who I mentioned in the ‘Scores on the Doors 2017’ Blog - the way it works is that she pretty much Buys exactly the same Stocks as me in pretty much the same quantities and at very similar Prices and Times with perhaps small lags and differences here and there. However, the amazing thing is how our Performances differ - they never are the same and are often wildly adrift. For example, in 2017 my Trading ISA did 19.5% for the Year but my mate’s SIPP only did 12% - yet in theory they should be very similar in so many ways. The bigger point here in relevance to this Blog is that even if you think you have an almost Identical Portfolio to someone else, it just takes a series of small Differences to mean that the Final Return Outcome is wildly dissimilar - so yet again the drawbacks of Comparisons are obvious.
• Fundamental Requirements of Returns - I haven’t headed this Bullet up very well - what I mean here is that Individual’s Drivers at a very profound and elemental level differ a lot. For instance, I probably need about 3% a Year on my Portfolio to enable me to Eat and go to the PUB whereas someone else who has less Capital than me and/or more Mouths to feed, might need 30% Return - so the psychological Pressures and motivations are probably very different between us and someone needing such High Returns won’t be able to eat if they follow the kind of relaxed and steady Approach I use to take on the Markets.

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.

Conclusion
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.

Regards, WD.


Related Blogs
The Compounding one:

http://wheeliedealer.weebly.com/blog/why-bother-investing-the-power-of-compounding

The ADVFN App and End of Day Numbers one:

http://wheeliedealer.weebly.com/blog/reporting-end-of-day-numbers-and-the-advfn-app

‘Monkey with a Pin’ blogs - all about how we manage a Portfolio:

http://wheeliedealer.weebly.com/blog/pin-the-tail-on-the-monkey-musings-on-portfolio-management-part-1-of-2

http://wheeliedealer.weebly.com/blog/pin-the-tail-on-the-monkey-musings-on-portfolio-management-part-2-of-2

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):

http://wheeliedealer.weebly.com/blog/horsing-around-this-weeks-sporting-coverage-comes-from-epsom-part-2-of-2

I’ve written a fair bit on Psychology but the Blogs here (there are links to earlier Parts) are probably the best to read:

http://wheeliedealer.weebly.com/blog/maybe-were-not-in-control-after-all-part-3-of-3