Saturday, September 30, 2006

Setting investment targets 1 comments

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Is it important to set investment targets? By targets I mean specific quantitative annual rates of return which one hopes to achieve on his investments. If so, what are reasonable numbers to aim for?

I used to be rather leary of setting investment targets. All unit trusts seek to outperform benchmarking indices rather than aim for absolute returns, in recognition of the fact that their performance is subject to the vagaries of the market. Of course, hedge funds do aim for absolute returns, but that is because they employ a variety of strategies such as shorting and arbitrage which are seldom available to the retail investor because one needs enormous leverage to magnify the small spreads. A relevant article that I've written is with regard to setting target prices for stocks, where I argue against being too rigid in setting price targets for stocks, given the changing dynamics of the market.

Yet, if we relate to businesses, why do companies set corporate profit targets? The purpose is to provide something to aim towards, a source of motivation for the staff. It is normally in recognition of the reality of the marketplace, or the target loses all credibility in the eyes of everyone. So perhaps we also need an investing target. And while we're at it, why not make it a big target. After all, the only people to whom the target is relevant is ourselves.

One of the things I remember most about Sim Wong Hoo is his coining of the acronym BHAG, for Big Hairy Audacious Goal. That is how he drove Creative relentlessly forward to become the global kingpin in soundcards, before they recently lost their way in MP3 players. Take in the essence of his philosophy: the target needs to be there to provide a sense of purpose or even mission, and it should not be too conservative as to lose the meaning of a "target". While it is not advisable to set price targets on stocks (effectively setting low upper limits) because we should try to let profits run where they can, it also makes sense to set audacious investment goals for our portfolio to keep us constantly on our toes (ie. setting high upper limits).

Warren Buffet says a reasonable target for a good to excellent investor is ~15% a year. That to me is not adequate as a target, which in our revised definition should be a bit divorced from reality (ok, you can choose not to read on if this sounds crazy). Employing another of his pet concepts, the margin of safety, perhaps one should also allow for some slack in the investment target and his actual performance, such that he will still be satisfied with the returns even though the audacious target has not been achieved (eg. 50% return though one aims for 100% target).

Setting high investment targets is effectively a form of alteration of one's mental state. One perspires only when one aspires, and one achieves only when one perspires. The secondary target must be to improve one's methods, and the constant drive to attempt to reach the primary target of high returns almost always leads to achievement of the secondary target. Let me share my personal experience: at one stage in 2004 I was holding on to relatively safe stocks that I felt comfortable with, could sleep well with and needed relatively little effort to monitor. These included thinly-traded stocks like Pertama, Tsit Wing, Sincere Watch. I knew the businesses were stable though rather staid in terms of growth potential; these stocks also paid good dividends. I was ok with holding them because I felt holding stable businesses wasn't a bad way to invest ..... eventually they would come to the attention of the market. The key word was "eventually" ---- how long is "eventually"? In retrospect, I figure it's always better to stack the odds in your favour, rather than relying on hope as a strategy. With no ambitious investment target, one can be content to just sit on stocks based on buy-in decisions that one had made at a single point in the past ..... though firstly, things might have changed; secondly, it makes sense to constantly revisit one's assumptions such that the buy-in/hold decisions are reconsidered subsequently at multiple points; and thirdly, one needs to account for market interest, through trading liquidity as one of the factors. At the end of 2004, I rethought my philosophy, chose a big hairy audacious investment goal, and almost immediately realised I had been getting too comfortable with my methods and the stocks in my portfolio. The second thing I realised is that there are almost always good bargains on the stock market better than what one currently has provided one looks assiduously, just as there will always be overpriced stocks that I can source for my HotStocksNot blog. The business cycle is evolving, various sector developments are evolving, other investors' responses and investment horizons are evolving. The market is dynamic.

I shall not reveal my personal investment target, which is clearly ambitious. However, it'll probably get less ambitious as I grow older. One of the key dangers is that one tacks on much more risk than he can manage given his age profile, in a bid to reach his audacious investment goal. As in a business, spot the opportunities, but also manage the risks, and do not bite off more than one can chew. Aggression in process improvement is generated by ambition.





Its always a great idea to set targets for your investments.

12/11/2012 4:37 PM  

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