How to Measure Performance of Investing ?
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We often heard story like that someone made $5,000 in stocks in one month. Cool. But that does not tell the whole story. Why?
There are a few questions I like to ask:
1) How much did he/she make the month before and after (that particular month)? Did he/she make more money (less money) or lose money in other months. We are looking for consistency here. Also in investing we typically measure performance in longer terms, e.g., by year, at least by quarter or 6 months.
2) More importantly, how much money did he/she started with? Is it $5,000 or $100,000. The return will be 100% or 5%, respectively. Big difference.
3) How much did the index do? Has S&P, Dow, or Nasdaq or other meaningful banchmark been up 1%, 5% or 10%? For reference, Warren Buffett has beaten S&P by 10% (averaged) in last 41 years.
4) Last but not least, a question new investors often ignore (at least I did), is how much risk did he/she took? I mean, was he/she trading blue chips (relatively safe) stocks MSFT, GE, or little known speculative stocks? Did he/she lose sleep because of holding risky stocks?
I will talk about my record in the near future. Stay tuned…