Your Gains May Not Be As Great As You Think

money If you’ve ever read Benjamin Graham’s The Intelligent Investor, you know he famously ended the book with this sentence: “To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks.”

That’s all well and good, but what, exactly, was Graham getting at here?

To put those “satisfactory” gains into context, he notes in the preceding sentence the typical investor can be successful — “provided he limits his ambition to his capacity and confines his activities within the safe and narrow path of standard, defensive investment.”

Unfortunately, too many investors don’t have the patience or emotional fortitude to consistently stick with Graham’s safe, value-oriented, defensive methodology.

To the contrary, instead of acting as defensive investors, many (read “almost all”) of us prefer the more exciting approach of acting as what Graham calls “aggressive,” or “enterprising” investors in search of those “superior results.” Unfortunately, we’re often more reckless than he would recommend, seeking out high-growth, speculative bets which come with excess risk attached.

When good is actually bad
Still, sometimes the stocks we choose can provide what appears to be fantastic gains on the surface.

The problem, however, is we often approach those gains with the wrong perspective.

For example, take OLED specialist Universal Display (NASDAQ: PANL), which has not only grown revenue at a more than 61% clip over the past three years, but also finally turned in its first truly profitable fiscal year in 2012 as Samsung sold millions upon millions of devices featuring OLED screens enabled by Universal’s technology. What’s more, investors have bid shares up as the market looks forward to the coming mass production of OLED televisions, and solid state OLED lighting solutions show promise down the road.

In all, shares of Universal display have risen 49% since July, 2010. That sounds great, of course, until we note that the S&P 500 index has risen 52% over the same period — and without forcing investors to endure Universal Display’s ridiculous volatility.

Or take Ford (NYSE: F), which has risen nearly 17% since March, 2010. At the time, Ford had just posted its first annual profit in four years, and investors were excited when the company suggested that 2010 would show continued improvement.

Ford certainly has come a long way since then, and it most recently wrapped up its 15th consecutive profitable quarter. However (and you can guess where this is going), the S&P 500 has offered an even more humbling 39% return over the same period, good for a full 22% of underperformance by my favorite automaker over the past three years.

Now don’t get me wrong: Many investors boast much lower entry points in both Ford and Universal Display, and I still own each of these stocks, with no plans of selling anytime soon. It’s difficult, though, to take solace knowing I could have achieved better results by doing absolutely zero homework and plunking my money in a low-cost mutual fund such as the Vanguard 500 Index Fund (VFINX), which is built to mirror the S&P 500 with an ultra-low 0.17% annual expense ratio.

“… harder than it looks”
To be sure, by definition, not everybody can be better than average, and beating the market is definitely a heck of a lot harder than it looks.

So, try not to judge your performance simply on whether you see red or black on your statements; if you’re not using the right basis for comparison, your gains may not be a great as you think.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. This article was written by Steve Symington, and first published on   

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