In today’s, over calculated, software world, we as an investor always calculates investment return in lot of ways. Investors do the return calculation, as per their own convenience. In today’s investment world, performance measurement in the field of equity investment has been largely corrupted and unclear with terms like, alpha, beta, sharp ratios etc, and color code system, all that is not easy and clear to understand for investors.

In investment world, there are two basic components, while calculating return, first is benchmark, against you calculate the return and second one is time period.

Today I am not going to tell you, what are the easy and useful parameters for performance measure? Rather I will take you in the past, where none other than oracle of Omaha, Warren Buffett gave two golden rules.

In 1962 Letter Buffett Wrote  to his partners….

Whether we do a good job or a poor job is not to be measured by whether we are plus or minus for the year. It is instead to be measured against the general experience in securities as measured by the Dow-Jones Industrial Average, leading investment companies, etc. If our record is better than that of these yardsticks, we consider it a good year whether we are plus or minus. If we do poorer, we deserve the tomatoes.

 

It’s very clear, the investment performance must be measured against the indices, In India you can measure against Nifty or Sensex, which include the dividend received, called total return index, don’t measure in plus or minus, if you read Partnership letters, Buffett want to beat Dow by 10 points, and its good target.

So don’t measure it by alpha, beta etc,

The second golden rule, where lot of investor fails, because of investors own psychology,

In 1960 Letter Buffett Wrote to his partners……

Let me, however, emphasize two points. First, one year is far too short a period to form any kind of an opinion as to investment performance, and measurements based upon six months become even more unreliable. One factor that has caused some reluctance on my part to write semi-annual letters is the fear that partners may begin to think in terms of short-term performance which can be most misleading. My own thinking is much more geared to five year performance, preferably with tests of relative results in both strong and weak markets.

 

The second golden rule talk about time period, one year is very short and half year is unreliable, and short-term performance, it might be positive or negative is highly misleading, Buffett look for five years performance, because it tests both the strong and weak markets results.

So anybody talking you about, one month, half-year or one year target, be aware and just forget what he thinks. In investment world Performance measure yardstick are changing as per the connivance, but don’t bother, stick to your own yardstick, first is benchmark and second is five-year performance.

To Your Success with Lot of Love!

Harish S Kawalkar

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