VALUE INVESTING
Measuring Up Your Performance

By Stephen Bland (TMFPyad)
July 4, 2003

Do you have a compulsion to measure your performance on a very frequent basis? Do you make one good trade, in a very short period, and then annualise it so that it looks much more than it really is? Further, do you find that this desire arises only after you have made a good score and you somehow feel much less of a need to do so after a poor result?

This is not necessarily a matter for value investors alone, though I am going to look at performance measurement with particular reference to that strategy. My feeling is that that there is an inverse relationship between performance and performance measurement. I cannot prove it of course, it is just an impression I have formed over the years from observing many small investors, latterly many on The Motley Fool.

It seems to me that the more frequently people measure their performance and the greater number of decimal places to which they do it, the less likely they are to have something worth measuring in the first place. The measurement itself becomes more important than the underlying activity. A generality which means there will be exceptions, but I believe there to be some sort of relationship here.

The current colloquialism for a mild obsession with anything is the word "anal", though like all good words it's now becoming stale through excessive use. You could say that paying too much attention to performance measurement is rather anal.

Put simply, an over enthusiasm for measuring performance is probably bad for performance. Beginners to value, or maybe any strategy, are more likely to go in for this than old hands, but I suggest that they try to avoid it. I have noticed many people who struck lucky with a short term trade in their early days then boast about how they made X% in a month which naturally, according to them, is 12X% on an annual basis, 12X sounding, well, 12 times better than X. Frequently you will never hear from them again, as they proceed to do badly after that.

The test of a person's investment skills has to be measured over a period of years so as to demonstrate that whatever style they are employing is capable of continued overall success. Anyone can get lucky. But can you get lucky ten, twenty, a hundred times? No. It then becomes some sort of strategy that is working, at least for you which is all that matters. But you don't need to know every five minutes how you are doing, not with a value strategy anyway.

If you making an average compound return of say 20% per year long term, that already puts you into the top handful of investors. It doesn't matter if it is 19% or 21%, they are both in that kind of league. And to achieve this, it does not help at all in my view if you sit down every day and find out that your return to date is 14.123% or whatever. It is unlikely that someone who even thinks this way, both on the frequent measurement and its pointless accuracy to several places after the point, is going to become a very successful long-term investor. This is especially true in the case value investing, where a contrary nature coupled with lengthy patience stretching to years is required often for successful plays to out. A desire for extreme detail is not conducive to the nature of a value investor. The more decimal places you desire, the less you probably are suited to this game.

In these days of the Internet, I actually advise people to avoid using spreadsheets which pick up the latest prices and calculate performance constantly. You should not want to know. It is not a desirable trait for a value investor. Leave that sort of thing to the bulk of non-value playing small investors who derive some sort of comfort from it. You want to go out of your way to be different. Wear a skirt when everyone is into trousers. All you need to know from time to time, infrequently, is roughly how you are doing. There is no advantage I can see for value investors in knowing this every day.

So forget about performance and concentrate on performing. You'll know instinctively after a time how you are doing. Maybe once a year, when you do your tax return is a good time, you can work out the details. But even then, something like "about X%" is plenty good enough.

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