I received an email from Thirunarayanan with some interesting questions and have decided to publish my answers to his email.
1. You said that your goal is to beat the stock market by 5-8%. How did you arrive at this lower and higher end ? And why is that important ?
The market on an average has given 13-14% per annum over the long term, maybe even more. In case of most of the value investors - ones with public record- i have seen an outperformance of around 2-3%. The greatest of them all - warren buffett beat the market by around 13%. So i have taken a goal which is not as ambititous as buffett, but more ambititous than the average. Also as i do this part time, i dont think it would be easy for me to exceed 8% above market - which translates to around 20-23% per annum over the long run (5+ years).
The above goal is important, for the reason that the time and effort should justify the rewards. i can easily match the index or maybe beat it by 1-2% via index or mutual funds. So i should cross the high water mark of 1-2% to justify this effort, else i am better off investing in index and mutual funds - which i do now too. I have been lucky to have exceeded my goal till date.
2. You also mentioned that you wanted to beat the stock market on 3 year rolling cycle. How did you arrive at that number ? And what is the significance of this number ?
The reason of having a 3 yr rolling period is that a yearly or lesser number is too short to confirm if i am beating the market or not. Over 1 year or less, luck plays an important role and one cannot be sure if the performance is due to skill. However as the time period increases, the element of luck reduces and skill plays a bigger role in the returns. The reason for keeping it 3 years is that it long enough to eliminate substantial a component of luck, but not so long that i dont get feedback for a long time on whether i am truly beating the market or not.
There are ofcourse no hard and fast rules on the above parameters and i have set them to my own specific case.
3. I am assuming that you are publishing your whole portfolio and your thought process in your blog. What are the chances of someone coat-tailing? What are your chances of seeing some competition and see a rise in the share price because of your publication ? Either you will share forever or there may be a time when you will have to stop revealing a lot (because of competition or lack of time to blog)
I have no issues people coat tailing me, although i dont think that is a problem yet. i am not yet so famous or considered a super investor that people will blindly follow me. in addition, my picks usually have a bad short term outlook.
So it is unlikely someone will just buy what i discuss and see immediate benefit.My approach on the blog is to share my learnings and analysis, but i dont give tips. So an individual is left to make his decision, which is not easy if you are just following someone blindly. Also considering i am small investor and followed by others like me, it is very unlikely that any stock i discuss will have a price run up after i discuss about it. if that starts happening ..then i have arrived in life :).
On continuing to share my ideas i dont know how long this will continue. i dont see it stopping in the next couple of years ..however i do have plans to start private investment partnerships. When i do so, i will have look at the constraints such an arrangement will have. However that is still a few years away.