Many investors mistakenly base the success of their portfolios on returns alone. Few investors consider the risk involved in achieving those returns. Most of the fatal mistakes in the market are made when the investor tries to chase ‘only’ performance.
An investor or the fund manager should remain focused on fine tuning and enhancing the investment process at all times such that performance is not looked at in isolation but along with other factors. And that essentially makes Performance a by-product in the process of investing and wealth creation.
So, what are the factors other than performance that an investor should bother about:
Remember, Portfolio returns are only part of the story. But what is that something else? In order to generate long term sustainable wealth for investors, a fund manager should look at Quality, Growth, Longevity and Price during his/her stock selection process.
Quality Business and Management: Does the company has a Moated business, healthy return ratios, favourable industry structure, industry leadership, low leverage. Does the company have Quality management – honesty, competence, rational capital allocation, growth mind set, shareholder friendly are important?
Let us look at Growth: Does the company have high intrinsic & profitable growth, large opportunity size, multiple growth levers, gaining market share;
Then comes Longevity: Does the company have Extended competitive advantage and growth visibility and
Finally Price: Is the company available at a discount to perceived value.
So, where does this all mean?
All of this leads to evaluating a risk-adjusted return, for the investment, enabling the investor to possibly see the whole investment picture. A portfolio that gives a 14% annual return at a Beta of 1.0 is a better risk adjusted return compared to a 15% annual return at a Beta of 1.1.
And therefore, we say that Performance, in this whole picture of portfolio evaluation, is just a by-product.
We hope you have learnt something new today, as it is our constant endeavour to educate and make an ‘investor’ a ‘sound investor’! Happy Investing!