Me vs. the S&P: An Insidious Habit

Like most of us, I have emotions about my investments. We all know that emotions get us into trouble, so I try to be aware of them. I’ve come to realize that one of the biggest drivers of my emotional state with regard to my portfolio is how I’m performing over some arbitrary timeframe relative to the S&P 500. And in the grand scheme of things, that’s kind of crazy.

From a big picture perspective, I couldn’t really care less what the S&P 500 is doing so long as I’m comfortably beating it over the long term. And I only care about it that much because tossing my capital into an index fund is the default strategy, so if I can’t beat it then I should just join it. But my performance today or next quarter or this calendar year or even this decade vs. the S&P 500 is completely irrelevant.

It’s so ingrained in us that it’s “hard” to beat the market (some would even say impossible over the long run, despite all the evidence to the contrary), that I’m constantly measuring myself against it, even on a daily basis sometimes. Which is silly to the point of being ridiculous, and even harmful, as that frequent comparison leads to other knock-on problems, such as paying too much attention to arbitrary timeframes: how did I perform this month? This quarter? This calendar year? It’s all so arbitrary, of course. And none of it matters over the long term. But to see how it can color our perception, consider this point Morgan Housel makes in a recent article:

Stocks are up 225% since 2009, which is one of the best five-year periods in history. They’re also up 53% since 2007, which, after inflation, is one of the worst seven-year periods in history.

So, are we in the middle of a blistering bull market or a drawn-out stupor?

What a difference a couple of years makes :wink:

Morgan goes on to say that “investing requires, more than anything, patience and discipline” but I think it requires something even more fundamental to truly succeed: confidence. Without confidence, it’s easy to give in to fear, or be swayed by headline numbers or the latest prognostications from the talking heads, or abandon ship at the first sign of trouble. We’re still going to be wrong and make mistakes, of course — confidence is not hubris. :wink: But it’s a lot easier to be patient and have the discipline to stick to our long-term investments and processes when we believe in the strength of our approach.

The best investments are often those companies that are out of favor at the moment, but it takes time for their true worth to become appreciated by the market. It’s only natural that there will be periods of divergence between our portfolios and the S&P. At best, comparison is a meaningless predictor of our portfolio’s long-term performance. But more insidiously, it can stir emotions, instill doubt, and erode confidence – all enemies of a patient, long-term approach.

So moving forward, I’m going to make an effort to pay a lot less attention to my performance relative to the market, especially over short time frames. It’s just not important, and I suspect it colors my decisions in subtle and unfavorable ways.

Neil

33 Likes

So moving forward, I’m going to make an effort to pay a lot less attention to my performance relative to the market, especially over short time frames. It’s just not important, and I suspect it colors my decisions in subtle and unfavorable ways.

Amen Neil, its the companies and how well you understand them and where they are going that matters. I can only hope that all of my companies get totally beaten down so I can buy them at cheaper value points so in the future I can reap the rewards. Study your companies.

Andy

2 Likes

But more insidiously, it can stir emotions, instill doubt, and erode confidence – all enemies of a patient, long-term approach. So moving forward, I’m going to make an effort to pay a lot less attention to my performance relative to the market, especially over short time frames.

It will be interesting to see if your screen name changes to something other than “nevercontent”, Neil.

Maybe, “occasionallycontent”?

Or “partlycontent”?

Hopefully, “newlycontentovershortimeframes”. :wink:

John

12 Likes

It’s so ingrained in us that it’s “hard” to beat the market

Hi Neil, but it’s not hard to beat the market. The market is made up of good companies and bad companies and companies that are going nowhere. Hopefully you can pick the good ones and leave the others for the averages to worry about. The problem is worrying about it every day, or month, or quarter. For example, this year large cap stocks beat small caps by over 10%. That gave the S&P a big advantage (this year) over people like us, who tend to invest in smaller companies. But in the long run, good small companies always beat the large companies, simply because they are smaller and can thus grow faster. Your goal should be to pick companies that will do well and the price will take care of itself.

Again, in 2010, everyone was talking about the “lost decade” of the stock market with “no change” (in the averages at least) for a decade. I was up almost 500% during that decade and didn’t know what they were talking about. I’m sure everyone on this board was at least profitable during that lost decade, just by following the MF.

I’d suggest you don’t worry about the day to day movements of the averages. Don’t even look at them. Think about your own companies and how they are doing in the real world.

JMO

Best,

Saul

5 Likes

but it’s not hard to beat the market

Absolutely agreed, Saul! I would guess that most long-term investors are probably doing just very well vs. the market. I actually wonder where this idea comes from? Is it simply because most mutual funds and brokers fail to beat the market because they’re constantly trading in and out, so therefore everyone decides it must be hard to do? Or is it one more way that Wall St. discourages individuals from investing their own money?

Hopefully, “newlycontentovershortimeframes”. :wink:

John, this made me laugh!

Neil

From a big picture perspective, I couldn’t really care less what the S&P 500 is doing so long as I’m comfortably beating it over the long term.

But my performance today or next quarter or this calendar year or even this decade vs. the S&P 500 is completely irrelevant.

Neil:

I agree on the whole, except when you say ‘even this decade’. I do think it’s important for people to track their performance against the S&P 500 or other relevant index because if in the long run you’re not beating the index then you are wasting your time (and money), but at what point does long term occur? I’d say if I’m not beating it over a decade then I’ve probably failed miserably. In fact if I wasn’t beating it over five years I’d be concerned.

John

(I thought I’d posted this yesterday, but apparently I forgot to hit submit!)

5 Likes

but it’s not hard to beat the market

Absolutely agreed, Saul! I would guess that most long-term investors are probably doing just very well vs. the market. I actually wonder where this idea comes from? Is it simply because most mutual funds and brokers fail to beat the market because they’re constantly trading in and out, so therefore everyone decides it must be hard to do? Or is it one more way that Wall St. discourages individuals from investing their own money?

Hi again Neil. I think it’s because most mutual funds can’t beat the market, because as they get big, they become the market, but they have to pay expenses, advertising, offices, computers and a manager, etc. Also most hedge funds can’t beat the market as they invest in zero-sum products like currencies and commodities (meaning on each contract one hedge fund manager makes x dollars and another loses exactly x dollars, but they have to subtract managing fees and expenses too). So people write books explaining how you can never beat the market.

As far as explaining some of the ups and downs in small caps, lets look for a minute at BOFI. At some time in March they hit $106. They are now at $75, which is down 29%. So, is this a bad company? Well in March their last reported quarter earnings was 91 cents and their trailing 9 month earnings (we are 3 quarters away) was $2.54. Now their most recent quarter was $1.20 (that’s up 32% in 3 quarters) and their trailing 9 month earnings is $3.29 (up 29.5% in 3 quarters). Their tangible book value is up 26% in 3 quarters.

Okay, so they were up too high in March on enthusiasm and were beating the S&P by a huge amount. Now they are down on irrationality and are probably behind the S&P year-to-date. Does that mean you won’t beat the S&P with BOFI in the long run? Of course not. It’s just that small caps have big swings when sectors are in favor or out of favor, while the averages are averages.

Hope this helps.

Saul

15 Likes

neil

another great post

Don’t know where the 225% came from. Jan 1 2009 the S&P was 825 and it’s now at 2067. Its up 1242 points for a 1.5 fold increase. Since we are often fast and loose with creating increases in excess of 100% which is all there is, what does 225% mean and is it equivalent to 1.5 fold per the article?

confused

Don’t know where the 225% came from. Jan 1 2009 the S&P was 825 and it’s now at 2067. Its up 1242 points for a 1.5 fold increase. Since we are often fast and loose with creating increases in excess of 100% which is all there is, what does 225% mean and is it equivalent to 1.5 fold per the article?

The S&P 500 total return index (which includes reinvested dividends) bottomed on March 9, 2009 at 1095.04 and is at 3770.03 today, so that’d be about a 244% gain. But Morgan is backing out inflation, which I’m guessing is how he arrives at 225%.

Here’s Morgan’s original article with that quote:
http://www.fool.com/investing/general/2014/11/19/why-i-love-…

Neil