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Tutorial - Measuring Success
OK, now we're going to talk about the fun stuff -- Investing.  The very first question we
should ask ourselves is:  How should we Measure Success when it comes to investing?  
Here are the two criteria I believe are crucial for measuring the success of long-term
investments.
  • First, use a very long yardstick -- that is, measure your returns over a 5 to 10
    year period rather than every quarter.  Why?  Because on a quarterly (or even a
    yearly) basis the price for which stocks sell are whipsawed by the emotions (fear
    and greed) of the crowd.  As a result, a stock who's underlying intrinsic value has
    increased by 15% in a year might sell at the end of such year for either 30% less
    or 30% more than its intrinsic value, depending upon the emotion or popularity
    the crowd places upon the stock at that time.  But over the long term (5 or 10
    years) the impact of those price swings tend to even themselves out and give
    you a more accurate measure.  By using a long-term yardstick, we achieve a
    tactical advantage over Wall Street -- where most investors are on a trip-wire of
    fear and greed at the announcement of each company's quarterly results.

  • Second, compare your returns to the stock market as a whole.  Let me ask
    you a question.  If your portfolio's return for the year is 2% are you going to be
    very happy?  Well, what if the stock market had a 20% loss for that same year?  
    Now how do you feel about your 2% gain?  That's the point.  While the stock
    market has historically achieved an average annual rate of return of 10% to 12%
    over the long haul (20 or 30 year period), in any given 3 to 10 year period it can
    be dramatically affected by the business cycle, which might result in either
    negative returns or unusually high returns over that period.  By comparing your
    portfolio's returns over a 5 or 10 year period to the returns of a market index
    such as the S&P 500 you can have a better perspective on your returns.

    How do you compare to the market?  By referring to a market index.  There are a
    number of market indexes from which to choose.  The S&P 500 Index (a selection
    of 500 of the largest U.S. companies in a variety of industries) is a good
    standard.  

  • Third, determine if you on track to achieve your Big Number.  If not, you need to
    either change your investment methodology or contribute more each year to your
    retirement fund.

What kind of return should I expect to achieve?  

  • Using a 10-year or greater yardstick, if you are 100% invested in the stock
    market, you should conservatively hope to see a 9% annual rate of return on
    your portfolio.

  • As you get closer to the time when you will be relying upon the cash generated
    by your portfolio for your daily living expenses you will want to change your
    portfolio so that it is more heavily weighted in bonds and high-dividend producing
    stocks.  As a result, you should expect an annual rate of return closer to 5%
    (depending upon your stock/bond mix).

Are there any guarantees of positive returns?  Nope.  We simply look at what has
worked in the past -- and, using a methodical, unemotional, logical approach --  walk in
faith.

Feel good about how we measure success?  Good.  Ready to go buy some stocks?  
Nope.  Not even close.  Now to the important stuff.  Finally to the stuff that matters.

As a wise investor, how do we identify a wise investment?  Since, as shareholders, we
will actually be part-owners of businesses, which businesses should we choose?

I prefer businesses with Economic Moats.  Click Here to learn about economic moats.
Investing   
Wisely  
The advice contained within this website is general in nature, only for the use of FI Investments clients, and should not be relied upon without first
consulting with FI Investments.