So How Did You Do?

Tate on Trading - So How Did You Do?

This time last year I posed the question of how we assess our performance and the traps that can be encountered by new players who fail to take into account cashflow.

This year I want to ask the question, 'So how did you do relative to everyone else?'

The prompt for this topic came from an article in the Wall Street Journal that was brought to my attention. Now I have to offer a disclaimer that I do not read any of the financial papers either domestic or foreign - the reason being I think they are a collection of post hoc rationalisations designed to explain events that the writers have no idea about. In short they are junk. However, this notwithstanding, folks are still inclined to send me various bits and pieces and occasionally there is an interesting idea in one of the parts of the papers assigned to technical matters.

This article asked the question 'So how did you do?' not only in abstract terms of your performance but it also asked the very interesting question of 'Who did you measure your performance against?' It made the very valid point that most investors/traders measure themselves against the major index within their market and that this default yardstick maybe giving a false measure of your performance.

Consider a situation where I am an active investor who only trades S&P ASX 200 stocks and I use no leverage such as CFDs or options to ramp up the performance. In such a situation it would be appropriate to measure my performance against the S&P ASX 200 Accumulation index. However if I used some form of derivative to enhance the performance I may be better off measuring myself against the S&P ASX 200 Buy-Write Index.

However, as I discovered when investigating this concept, this could be problematic. In the last financial year, the Accumulation Index substantially outperformed the Buy-Write Index. The Accumulation Index registered a 28.43% gain, as opposed to 16.67% experienced by the Buy-Write Index. Interestingly, the same situation repeats itself in the US where the CBOE Buy-Write Index has less than half the yearly return of the Dow Jones Total Return Index. These figures undoubtedly speak volumes.
In short, a mechanically driven, automatic method of writing call options in the middle of a bull-run is basically suicidal."

So the question becomes, 'Against what index should a trader benchmark themselves?' If they have a narrow investment focus then a reasonable substitute could be one of the broad market indices. However trading styles can vary widely from a simple buy and hold form of indexation. In this instance where a suitable benchmark cannot be found among the listed indices such as the Small Ordinaries then a surrogate will need to be found. The answer lies in ratings firms such as Morningstar or DirectAccess who list the multi year performance of managed funds across a wide variety of investment styles. For example if you had a growth model of trading that restricted the universe of stocks you invested in to, say, mid and small cap issues, you may compare yourself against Australian managers who have the same style of investing as you do. The same approach could even be used to measure the performance of your bond or property portfolio.

In short it is possible to construct a benchmark for any form of trading you undertake - all it takes is a bit of work to create your own.

Cynical Moment of the Week

Whilst sitting watching the news, on came an item about investment clubs in Melbourne and how easy it is to make money in the market. One can draw their own conclusions about the implications of this...

- Chris Tate

 

Which is why I was bemused why people were investing in such funds promoted by Peter Spann and the donut...

But I guess it's easy to be wise in hindsight. Perhaps they'll do okay over the longer term...

N.

 

Price of a donut went up $2 today though

Not being an options person arn't their best used as insurance for your portfolio? If so you would hope to underperform the index in a bull market.

 

"Which is why I was bemused why people were investing in such funds promoted by Peter Spann and the donut..."

I would say that people follow them because of their lack of basic knowledge.
It's probably easier to follow magazines' or TV presenters' recommendations than educate themselves.
Some people are very 'resistant to knowledge' and possibly some of them still believe in Santa Clause.
That is why, statistically the majority of players are losing money.

"But I guess it's easy to be wise in hindsight."

Hindsight has nothing to do with it (IMHO) but it's wise and advisable to get a basic knowledge to avoid nasty surprises.

Once I asked Ch.T. why he is trading options most of the time...
His answer was: I have got approx. 80% chance to win...
So I asked him what makes you think that way...
He replied - because a lot of options players have got no idea what they are doing.

Above statement may apply to : ".... to offer a disclaimer that I do not read any of the financial papers either domestic or foreign the reason being I think they are a collection of post hoc rationalisations designed to explain events that the writers have no idea about."

If you want to see how 'market noise' (tips and financial papers etc) affect your trading/investing judgement read the book : "How I Made $ 2 000 000 in The Stock Market" by NICOLAS DARVAS.

"Perhaps they'll do okay over the longer term.."

Perhaps ... but I would not bet on it.