NOTE: A new section has been added to the Whittler: Voyager RNS Log where I take a weekly or thereabouts, review of any RNS stories that are relevant to shares that I either hold or are of close interest: see page in the header menu.
It may seem a strange thought but it’s worth taking a little time to just ask yourself this simple question “why do you invest?” Yes, I know there could be a great many different responses to such a question; they could range from the most impractical to the very sound well-planned strategy. Whilst I suspect there are many individual reasons some of them may include the sensible such as “To make a better return than you could by simply leaving you money in the bank, building society or other deemed to be safe alternatives”. Then there are also the less sensible reasons such as “it gives me a thrill & I like the adrenaline rush” and the dreaded “I want to get rich quick”.
So, whatever your reason for investing, another question, do you benchmark your portfolio on a regular basis or indeed, should you benchmark your portfolio?
Well before we get into such a discussion, then let’s understand what I mean by benchmarking in the context of this article: always a reasonable place to start, so what are we talking about? Well, it’s about measuring the performance of your portfolio against an alternative investment vehicle or Index. For example, you could simply measure your performance against a soft “should be easy to beat” benchmark such as the FTSE All Share total return (FTSE AS TR). I say soft as that index includes such a large number of stocks including quality ones and ones not of such high quality. If you can’t beat the FTSE AS TR on a very regular basis, and incidentally most fund managers can’t, then maybe your benchmark finding is suggesting you should modify your stock picking approach. Of course, you could constantly put a smile on your face and benchmark against the Boris Becker Nigerian Oil Company system? No, sorry Borris but no thank you if only he had read the basket case blog!
Alternatively, you could benchmark against a fund or guru style of investing that you respect or admire and that you would be happy to beat on a regular basis. Anyway, we will come back to my way of benchmarking after a few more paragraphs of background.
Now let’s go back for a moment to consider why, at least in my opinion, you should benchmark. Well, Peter Drucker, the management consult and author of many books on management is credited with the quote "you can't manage what you can't measure." What Drucker is really saying is that you can't know whether or not you are successful in what you are trying to achieve unless success is defined, measures agreed and performance tracked.
Ok, that’s fine enough but in the twilight world of our portfolio performance what does that actually mean? Well, firstly it means that we keep strictly accurate and honest records of our investment decisions both in terms of the reason behind each investment decision and the performance or that investment. Now to me having learnt the hard way many years ago from my experience in horse racing betting, if you don’t keep accurate honest records then your mind has a natural bias to place you in a fantasy place where you so fondly remember the winners and that feeling of exhilaration but anaesthetise the overall performance: in those long ago days was I making money or simply providing the good old honest bookmaker with a comfortable living. Needless to say, once I started keeping decent records on my betting activities my flirtation with the world of horse racing came to an abrupt end: I was just not making money simply letting the good times blot out the overall performance.
Thankfully these days, dynamic record keeping of our transactions is made just so easy for us. We can use free tools such as basic brokers ledgers, the free portfolio services of the LSE to track transactions or the more sophisticated alternatives such as Sharescope/Sharepad. So, really, we don’t have an excuse for not keeping a track of progress.
Record keeping is no longer an issue & we can keep Mr Drucker as we can measure our investment performance.
That’s fine, we can measure our performance but does an average return of say 4% sustained over a number of years make it worth our while. Would we be better off simply handing over our funds to say Terry Smith of the excellent Fundsmith or Warren Buffett’s Berkshire Hathaway?
So, we have the concept of measuring performance over a period of time and the thought of at least trying to beat the FTSE All Share Total Return; note, I say total return because dividends historically form a large percentage of one’s overall sustainable return. Our first measure then is to assess our total return over time against the total return of the FTSE TR and hopefully we can beat it in say four years from five. However, let’s make things a little tougher and start to measure against something more challenging than the FTSE AS TR. The choice of what we consider as tougher is entirely up to us but for my part, I like to measure against two highly respected large company funds; Fundsmith & Berkshire Hathaway whilst the smaller company funds I measure against are Henderson Smaller Companies IT and Marlborough Special Situations Fund. These benchmarks have performed excellently over the past three years with Fundsmith returning about 100%, Berkshire Hathaway 33%, Marlborough 50% and Henderson Small Co IT also 50%. In comparison the FTSE All Share total return has offered a still good but softer 26% return over the three year period.
Graph below shows a simple benchmark comparison between my Tinker Portfolio & Berkshire Hathaway/Marlborough Special Situations/FTSE ASTR over the period since inception of the Tinker in January 2016. The software I use here is of course the superb Sharescope.
Note: click or tap on graph to enlarge.
Now you might think that my approach to benchmarking is being a touch hard on myself but I prefer to think of it stretching as I take the view that to adopt realistic but stretching targets makes you improve at almost anything.
Finally, what do you do if you find you are falling short of the performance of your chosen benchmarks. Well firstly don’t panic if it’s just for the odd year or two and definitely don’t take foolish risks in order to bridge any gap. Secondly, remember that successful investing is about learning and then even more learning: take a slow detailed look at your stock selection, your risk management and also ask yourself are you ruthless enough to rapidly jettison losers whilst nurturing the winners or do you try to convince yourself that you will be right in the long haul and that loser will eventually turn.
It’s my experience that by adopting a culture of benchmarking your performance can indeed make you a more successful investor.
Welcome to my Blog Page - I hope you find my whittling on to be of some interest. I am a private investor who is happy to share thoughts on the market and individual stocks. Please remember that I am definitely not offering tips or investment advice.