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What Bill Gates Can Teach Us about Investing

100px-Bill_Gates_2004_cr Bill Gates is among the richest people in the world with a net worth of around US$67b. The company that he built his wealth with, the Windows software-maker Microsoft, has gained 31,500% since March 1986, making many other investors wealthy along the way.

But, he wasn’t an investor and has never shown any inclination in being interested in being one.

In fact, when Gates was first given the chance to meet American billionaire investor Warren Buffett on July 1991, he didn’t even want to. He thought that he would have nothing in common to talk about with a person who just looks at stocks (just to clarify; Buffett and Gates are now very close friends).

And even now, Gates has never been known for his investing prowess. So what can he actually teach us about investing?

For starters, it’s not about special insights he might have about finding the next Microsoft, nor what investors can expect their companies to learn from Microsoft to become the next market beater.

Instead, this is about a simple but profound idea that Gates has about measurement that could possibly do wonders for investors’ results.

The power of measurement

You see, to Gates, the whole act of measuring gives people the chance to collect feedback about their actions in any particular activity they’re engaged in so that they can achieve the best results possible.

In an article penned by Gates that appeared on the Wall Street Journal, he said he was “struck by how important measurement is to improving the human condition” and went on to cite a few examples.

These include; an improvement in teaching standards in the USA due to a proper evaluation-and-feedback system; a reduction in infant mortality rates in Ethiopia as the Ethiopian government started collecting data on disease outbreaks and immunization programmes to see what works and what doesn’t, in addition to collecting statistics on child births and deaths which it did not previously collect.

The different forms of measurement and feedback on progress have led to much better outcomes and helped improve the lives of many. But the unfortunate thing is, in the realm of investing, most investors aren’t even measuring their portfolio’s performance, much less trying to measure it properly.

Investors simply can’t measure

A study done by Markus Glaser from the Munich School of Management and Martin Weber from the University of Mannheim found that investors were simply clueless about their own investment performance. They often overestimated their own returns when quizzed on how well their overall stock-portfolio did.

In Glaser and Webber’s words, “investors are hardly able to give a correct estimate of their own past realized stock portfolio performance”.

Even my own anecdotal experience seems to suggest that this is a common phenomenon. I’ve been seeing posts in my social media circles about folks who have seen many of their online-friends boasting about market beating returns!

Why measurement is important in investing

But, why exactly is measurement important again? Well, that’s because of opportunity costs. A $10,000 investment compounding at 6% over 20 years will turn into $32,000. Meanwhile, the same investment growing at 7% per year will become $38,700. The difference of $6,700 in the return-amount is not trivial.

In other words, in long-term investing, every percentage point counts when we’re trying to compound our wealth over decades!

If we can’t measure our performance against an easily investable-benchmark like a stock market index to see if we’ve done better or worse, we might miss out on a better investment vehicle with which we can build our wealth.

At home in Singapore, such a benchmark could be the Straits Times Index (SGX: ^STI). It’s used as a general barometer for Singapore’s stock market and investors can invest in it through an index tracker like the SPDR STI ETF (SGX: ES3) or Nikko AM Singapore STI ETF (SGX: G3B).

Foolish bottom line

The STI has compounded by around 5.6% per annum to current levels of around 3,270 points since the start of 1988. Has your entire investable portfolio done better than that?

Here are two common forms of portfolio-return measurement that you can use; time-weighted rate of return or the money-weighted rate of return. So, do yourself a favour and measure!

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Chong Ser Jing doesn’t own shares in any companies mentioned.