EVERY ELEMENT OF money management, from economics to analysis, security selection to stop-loss orders, comes down to answering one important yet often underappreciated question: How am I doing? Because after all the reports and research, all that really matters when it comes to your investments is the bottom line. Asking “How am I doing?” is a simple reminder that this whole exercise is about one thing: making money.
Of course, the question is always relative. Back in the late 1990s, anything less than a 20% yearly return was seen as downright shameful. Active managers were chided for holding cash, taking profits or deviating even the slightest bit from the index. In those heady times, a single-digit return was an embarrassment.
But when the bubble burst, and indeed up until this year, just staying above water has been perceived as commendable. In fact, plenty of managers have boasted of their good “relative” performance, having lost only single digits, for example, at a time in which the S&P 500 index was down significantly more. Of course, I don’t know many groceries that can be bought using good “relative” performance, if that performance still happens to be negative. (more…)