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D.Muthukrishnan (Muthu), Certified Financial Planner- Personal Financial Advisor

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Performance Gap

Posted by Muthu on December 15, 2014

I invest both in stocks and mutual funds. As you are aware, mutual funds have done phenomenally well for all of us. My stocks also have done well but not great like for some others who are part of a small set of stock investors group to which I also belong to.

Right or wrong; performance comparisons invariably happens. It’s fine as long as comparison doesn’t lead to envy or contempt. Positive side of comparison is that it can lead to introspection and motivation.

My stock performance has been sub-par when compared to another investor (let us call him Mr.X) in the group. Please note that it’s all relative. 100% returns in a bullish year can be considered sub-par with 400% returns in the same year!

I tend to invest in stable, known, high quality, having consistent track record and sector leader kind of companies. This kind of companies can be a steady compounder over long run but may not produce a 5 multiplier or 10 multiplier kind of returns over say a 3 year period. Multi baggers in medium term happen mainly in small cap & microcap space. These companies are lesser known, may not have a long term track record and have the potential to become future leader in the sector. Here the risk is high but the returns can be mind boggling.

Despite being a person with strong equity preference, I don’t like to be aggressive with my money. I’m fine with lesser rewards for accepting lower risk. I always look for downside there by limiting my upside.

In a market when small and micro cap get re-rated, an astute stock picker like Mr.X tend to reap phenomenal rewards. My returns pale in comparison to his. Can I be like him and make the same kind of returns?

On introspection I found that if I try to be like him, I would be stressed, anxious and may even lose my sleep. My stress levels and lack of conviction would make me take wrong steps which can lead to huge loss of capital. He is of different make. He has high conviction on his ideas and the ability to handle the stress. I somehow lack the knack to identify tomorrow’s winners and develop conviction on them.

Let us assume I would be making around 18% annualised returns over next 20 years. This means I can multiply my capital by 27 times over next 20 years. Let us assume Mr.X would be making 25% annualised returns over the same period. This means he would multiply his capital by a whopping 87 times over next 20 years. Difference in approach can lead to this much performance gap.

Still I would like to stick to my approach. In markets, the first and foremost thing is to understand who you are and what you want. If you don’t know who you are, markets would be an expensive place to find the same. The moment you understand who you are, you develop conviction in your methodology. This conviction would come very handy in bear markets and bad times. Most people lose in stock markets because they lack conviction when it is needed most.

To quote Jason Zweig:

Investing isn’t about beating others at their game. It’s about controlling yourself at your own game.

To quote Tadas Viskanta:

What matters is that they (investors) can devise a strategy and stick to it….. In the end, we are better off with a suboptimal strategy that we can follow, rather than one we don’t fully understand and will abandon at the first sign of trouble.

This is my story of me not wanting to copy my friend though he is kind enough to share his insights and there is a huge performance gap between us.

Do not always look for any message or moral from what I write. Some may have; Many may not have; I write because I like to share my thoughts with you. The same holds good for this piece as well.

3 Responses to “Performance Gap”

  1. Nishanth Muralidhar said

    Muthu, good story…What you said is absolutely correct , that we all need to follow a unique path tailored to our personality and behavioral traits and comfort levels…My question to you is that across all your articles , I have seen you assume a annualised return of 18% ( and seen the reasoning behind that as well )…Wouldnt it be much safer to assume a return of 12% from equity MFs over decades ? There is no potential donwside on this and only upside.If we manage to achieve 18% returns , then great.If not , anyways we achieve our goal of 12%, even with lower growth of economy. This can also have the added advantage of making people save more for investing and not just depend on returns alone.

    • Muthu said

      One advantage of assuming lower returns is that it would induce you to save more. I understand. Since I feel 18% return is possible and realistic, I continue to assume the same. In investment, everything is subjective, including the return we project. I’m extremely confident on the future of our country and economy.

  2. srinivas said

    Good article. Suboptimal returns over the long term is better than no return say in 2 years. It is the time in the market and not the timing that helps. Behavior and our ability to watch ourself . our expectations and our willingness to accept are more important than being intellectual ly correct.

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