Mutual funds are in habit of comparing their performance against some benchmark index or the other. While they are busy with relative performance derby, we investors should focus only on absolute returns. Here are a few thoughts on this from some successful investors.
“An absolute-performance orientation is consistent with loss avoidance, a relative performance orientation is not.” Seth Klarman
“Our primary focus is on absolute value versus relative value. Because we are focused on absolute returns, we will hold cash in the absence of values and an appropriate margin of safety.” Arnold Van Den Berg
“Real people live in the absolute world. We spend absolute dollars. If I sent my clients a relative performance orientated letter—“Dear Client, we are pleased to report that we beat the market this year by 300 basis points; the market declined 43% for the year but we only lost 40% of your net worth” – I don’t think any of them would be thrilled.” Seth Klarman
“We consider ourselves to be ‘absolute-return’ investors and do not compare our results to long-only indices. That means our goal is to try to achieve positive results over time regardless of the environment…. In assessing an investment opportunity, a relative return investor asks “Will this investment outperform my benchmark?” In contrast, an absolute return investor asks, “Does the reward of this investment outweigh the risk?” This leads to a completely different analytical framework. As a result both investors might look at the same situation and come to opposite conclusions.” David Einhorn
“If more institutional investors strove to achieve good absolute rather than relative returns, the stock market would be less prone to overvaluation and market fads would less likely be carried to excess.” Seth Klarman
“We study companies and try to find undervalued securities… We’re absolute value investors focusing on asset values, book value discounts and low price to earnings ratios to normalized earnings. And we aren’t interested in so-called relative values — you know, something selling at 20 times earnings in an industry group with a 35 multiple.” Thomas Graham Kahn
“The pressure for short-term performance versus a benchmark can easily disorient the investment brain of a portfolio manager. What should matter is capital enhancement in bull markets and capital preservation in bears; in other words absolute, not relative returns.” Barton Biggs
So, stop comparing your portfolio performance with Nifty 50, BSE 30 or your neighbour’s.
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