Good, Not Great
I started racing BMX when I was 12 years old, and I truly devoted almost a decade of my life to the sport. I ate, drank, and dreamed BMX. It was a fun and memorable season of my life; the people I met and the places I traveled were unforgettable.
I was good at BMX, but I wasn’t great. It’s sort of funny because if you talk to my friends and family who were outside of the sport, they’d tell you I was great, they’d tell you I was a legend. Inside the sport, friends and peers would probably describe me as good – which is the right description.
Not Quite An Olympian…
It all depended on how you were measuring my talent. Or maybe better said, who was measuring my talent? What’s the knowledge/background of the assessor? Are they a credible source? You’d want to know what the relative benchmark for my greatness (or goodness) was. My close friend I grew up with medaled at the 2008 Olympics in the sport of BMX. He was great; relative to him, I was good.
Yet, in the eyes of my mom and my dear friends, I’m flattered to be a fairytale legend.
Just like my athletic resume, in the world of investing, we have to navigate the same challenges when assessing results and outcomes. Today we will unpack some of the pitfalls around measuring results and also some best practices.
Let’s jump right in…
Objective Driven
When I raced BMX, my training schedule and routine were designed to support a specific outcome – winning. BMX is a sprinter sport, so most of this training was to develop fast twitch muscles. This event [BMX] is a 45-second sprint, so very little need for endurance. We simply needed to be able to go as fast as we could for a short defined time period and then a reasonable time for recovery so that we could do it again.
The training was aligned with and supported my goal of winning. To do this, I needed to get faster.
Here’s one of the most common mistakes I see investors make – they don’t have clear objectives. I’m a broken record with this next statement, but the portfolio must be aligned with the financial plan and be built to fulfill/support the objectives of that plan.
There is a lot of training that I could’ve done that would’ve actually hurt my results. I literally could’ve spent hours at the gym and on my bike, but if it was the wrong type of training it would’ve just caused more harm than good. This same truth applies to investing. You can’t just buy investments that seem nice, you need to build a portfolio of investments that work together to scratch the itch of your financial plan.
A Full Cycle
Another common investor mistake is being too quick to judge results. For each investment (stocks, bonds, real estate, etc.) there is a time horizon or appropriate period for measuring outcomes. Stocks can do goofy and frustrating things over a one-year time period. These more volatile type investments need a full cycle – sometimes 10 years – to really reflect the results you are looking for.
BMX athletes were not immune to this same plagued paradigm. The great athletes would calibrate their expectations based on where they were in their training cycle. They knew based on the regime when they’d be peaking in season, so if they were “out-of-peak” they’d basically settle for less desirable outcomes. They were willing to lose a battle here and there if meant winning the war.
Absolute & Relative
When friends outside of the sport checked in with me after an event, I always had to give them context. I needed to contextualize the results so that they could understand my excitement or my disappointment.
This depended on a lot of factors. When I first started to become relevant at the national level, simply making it to the main event was a big deal. As I matured in the sport, a second place at a smaller national event could be very disappointing.
Where I was competing, who I was competing with, where I was in my own development – all these factors mattered for understanding results.
When it comes to investments, we often measure them in two ways – absolute and relative. Again, we do this to contextualize results. The absolute will tell you the actual result, which could be +10% or it could be -2% or any other figure under the sun. Just like my BMX results, the outcome at face value (absolute) was helpful for a first report, but additional details were needed. Why? Because -2% could be an incredible result in a year like 2008 or +10% could be a disappointing result in another year.
Like I said, you need more details. To make results relative, you need a lay of the land – average results for that time period, the composition of the portfolio, etc. An isolated return figure on a report needs an accompanying narrative to create a deeper understanding of what actually happened.
Now, you also don’t want someone spinning a narrative to try to deliver sunshine. You will have bad years, just like I had lots of bad races. Your portfolio and plan are imperfect; you want to focus on the whole body of work not just one isolated time period. You strive for long-term outcomes and you also want to understand the results along the way.
Apples & Carburetors
False benchmarking is also a common investor stumbling block.
When Moses brought down the Ten Commandments from Mount Sinai his people were struggling with coveting. Guess what? People still struggle with coveting, especially in the world of investing.
You have a plan, and hopefully, you have a portfolio that is designed around the objectives of that plan. Here’s the best advice I can give you, keep your eyes on your own paper. Just like a high school exam. Don’t worry about the Jones family and their plan, allow your energy and focus to be consumed by your own plan.
I can’t tell you how many times I’ve seen people salivating over the results of a single stock they don’t own or some off-the-wall cryptocurrency and wishing they had a piece of the action. Mind you, an investment that has no place in their portfolio.
I grew up in a small town. I competed in a small sport (BMX). In this same small sport, in this same small town, lived an Olympian. I can tell you a thing or two about focusing on your own outcomes. You must run your own race.
Attribution
Now, let’s talk about attribution. This is a concept that is simple and powerful for each investor to understand.
I remember one BMX event that took place in Ontario, CA. People traveled from around the world to compete and it was pouring rain. So much so that they had to keep making the track shorter and shorter – people weren’t making it all the way to the finish line. It was an absolute mud fest. The young man who won this event had never won a race at that level before. I’m not sure he’d ever even made it to the main event at that level before.
Context matters, right? What had a big attribution to his win? The rain. Just like a gambler needs to know the location of a game, because home field can be a big advantage.
Here’s a chart David shared in a recent DC today:
A handful of companies – seven, to be specific – are the attribution for most of the returns in the market this year. Mind you, a market that is nearly the same price today as it was two years ago. David also mentions that those seven companies have an average multiple (price-to-earnings) of 50x. So, if you’re an investor who cares about valuations and paying a fair price, your results probably look like the black line, not the green line.
Attribution matters; context matters.
Flat Markets
We will end on a flat note.
As I mentioned, markets have been flat for about two years now. This makes for a difficult environment if you want to spend down some of your nest egg. Where do you draw from when returns don’t exist? Furthermore, if this two-year period has been rough, imagine what the lost decade (2000-2010) felt like. That was 10 years of no returns.
This is why I love dividend growth investing. A growing sustainable income seems like the perfect marriage to a financial plan that will one day depend on income.
A lot was covered today. I hope you enjoyed it. It’s always fun to go down the BMX memory lane for me, especially when I get to tie it into investing 🙂
