Last month a friend kicked off a bit of a storm on Twitter one morning by calling out traders failing to make more than 50% returns a year from spread betting. The thread went on for a good hour or so but it made me start to think about what I consider to be a good return for an investor and why.
When I started investing, I didn’t have an annual target – I just wanted to ‘make money’. Providing I placed more winning trades than losing ones, this was an easy goal to meet and after a few years, I tightened my desired rate of return to ‘beating inflation’.
Here in the UK, this is generally measured by something called the Consumer Price Index (CPI) which is calculated as the average price of a basket of around 700 goods and services. Around the middle of every month, the Office for National Statistics (ONS) collects information on the prices of these commodities from over 100,000 different retailers and companies and calculates the average by which they have increased. The ONS is also responsible for determining which goods and services are in the basket and changing them over time to reflect the ‘average’ purchases of households across the UK.
This CPI is provided as a percentage increase or decrease every month, providing me with a useful benchmark to beat of around 2-2.5% a year.
After a few more years of investing, I changed my target again to a 9% annual return (5% capital gains and 4% dividend yield). This is the current benchmark I use and thus far has been enough of a challenge without forcing me into overly risky or speculative holdings. I set this target based on one of my key investment principles – don’t be greedy!
A good rule of thumb for whether you’re becoming greedy or not is whether you’re secretly fantasising about your investment doubling or tripling in value. If you’re spending more time thinking about the price than the underlying business then I’ve got a horrible truth to tell you – you’re not investing, you’re speculating.
I know plenty of traders who tell me they make 10x my returns in a year but I have no idea of their risk profile compared to mine (I suspect it’s significantly higher than my own but this isn’t guaranteed). I’m not generally into the whole ‘my stack is bigger than yours’ conversation and believe that most ‘traders’ are actually losing money, or just about to. There’s plenty of money to be made in the markets but multiple studies have proven that rather than providing a good return for an investor, the majority of day traders crash and burn their accounts horribly over time.
For me, your returns should be firmly based on your abilities; if you really believe you’re the greatest investor in the world, then chasing 20, 30, 40% returns isn’t out of the question. The truth is, however, that given the chance, most of us would have backed Yahoo! over Google, if we’d even believed that ‘search engines’ were going to become such an integral part of the future.
I’ve never understood the desire of some investors to pile into companies that generate no profit, or to construct portfolios of speculative start-ups and resource stocks based in remote, war-torn locations. Personally, I’d never have a good night’s sleep again if I was to place my family’s money in such ventures!
Certainly, if you can find an exploration company that strikes a gold deposit or invest in the future of AI before it’s been developed, there potential returns are vast. If you’d invested £10,000 in Amazon at IPO in 1997 you’d have over $15m today. The vast majority of that growth, however, has come in the last ten years, as the share price has grown from $120 to over $3000. The truth is that for every Amazon out there; every loss making start-up operating out of a garage that one day becomes worth billions, there are dozens and dozens of companies that collapse and even more who trundle along for years, building up increasing debts and diluting shareholders year after year.
A good return for an investor is whatever you have earned. If you’ve done your research and you understand the company and the value, if you’re patient and careful, and most importantly if you’re smart enough to really see genuine opportunities as opposed to just believing you do, then your returns could be many multiples of my 9% a year.