There are two common mistakes which investors commit when it comes to reviewing their investment returns.
First, most investors do not track their returns. There is no feedback loop to inform the investors if they are investing profitably, or if they have beaten the index.
Second, most investors look at individual stock returns instead of the portfolio returns. The volatility of a stock is usually higher than that of the overall portfolio volatility. Hence, the investor often unnecessarily scares himself with one big loss, or motivates him to take profits quickly in fear of losing them. The right thing to do is to look at the forest, not the individual trees.
With these two points in mind, let us review the CNAV Stocks Portfolio performance in the past year. The CNAV portfolio beat the STI returns, 39% vs 10%.
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In the past 6 months, CNAV Portfolio actually under-performed the STI, -4% vs 2%. This is normal as short term returns are erratic due to the volatility of the stock market. In fact, 1-year performance can be considered short if we take reference to Buffett’s 5-year test, where he compares Berkshire’s returns vis-a-vis S&P 500 over a 5-year period.
Short term returns can be a combination of luck and skill. Long term returns is more reflective of skill as luck runs out.
Let’s dive deeper into the portfolio to illustrate why one should not be concerned about individual stock performances.
I will show the top 3 performing ones and the worst performing one in this CNAV Portfolio.
The largest loss was Lafe with 55%. I will be very miserable if I focus on the loss, despite the CNAV portfolio returning 39% over the past year. Remember the 39% returns has taken this negative 55% stock into the calculation. The stock didn’t pull down the portfolio performance significantly. This is why we should not focus on the individual stocks, but look at the portfolio returns.
At the same time, it is very tempting to take profits for Hongkong Land, Fortune REIT and Hong Fok, as they have almost 30% gain to date. But I would not sell prematurely because I am going for greater returns. If I have been taking my profits early, I won’t be able to reap a 188% gain in PNE Industries last year, which contributed significantly to the Portfolio performance.
It is the outsized gains that overshadow the paper losses in the portfolio. If you take profits at 10% for each stock and keep those stocks which have dropped 50%, it mathematically shows that you are losing money. Keep the winners longer and make bigger gains. That’s what matters over the long run.
For each CNAV stock, we aim to make at least 100% gain to justify for the risk we are taking. We do not know when the returns will come but we know it is worth waiting because of the high potential returns.
Photo Credit: Ken Teegardin