Sounds unbelievable. If you are spending time and effort on an activity to earn more, measuring the outcome should be obvious. Yet many investors do this with direct equity. “I want to generate higher returns than what I would get by outsourcing my equity investments or investing passively,” said Roy. But then comes the important question: Are you measuring whether you are actually achieving this goal?
Roy, like many direct equity investors, can instantly recall successful investments. “I bought this stock at ₹200; today it is at ₹1,000.” That is undoubtedly a good outcome, but it tells only a part of the story.
What matters is the collective performance. What happened to the stocks that did not work? How much weight did you give to winners versus losers? How long was cash lying idle?
The only way to answer these questions is to measure portfolio-level returns generated on your cash flows. At what rate did your overall portfolio grow? Technically, extended internal rate of return (XIRR) is the appropriate way to evaluate the actual investor experience.
Without measurement, improvement is almost impossible.
Making money is not enough. Equity markets generally create wealth over long periods, so a positive return does not prove success. The relevant question is: Did your effort create additional value?
Compare your portfolio with the Nifty 50 Total Return Index (TRI). Suppose your direct equity portfolio generated 10 per cent annually while the Nifty 50 TRI delivered 12 per cent. You did create wealth, but you spent hours researching companies, tracking results and making decisions, only to underperform a passive alternative.
In that case, you effectively did a fund manager’s job but were not paid for it. Your “salary” for the additional effort was supposed to be the extra return, or alpha, generated over the benchmark. Without that extra return, your hard work and emotional strain went uncompensated.
Roy was surprised that he had not thought about this basic data earlier and that such a fundamental number was not readily available. Today, investors can access charts, ratios, research and corporate announcem-ents within seconds. Yet one of the most important numbers is often not easily visible: What return did my overall portfolio actually generate? The industry has made it extremely easy to know what your stocks are doing, but it is not always easy to know how you as an investor are doing.
Reviewing is not about the profit on a single stock or the percentage gain of the biggest winner. It is about knowing the complete portfolio return after considering every buy and sell decision, every mistake and every success.
Platforms do not highlight this data simply because investors have not deman-ded it enough. The next evolution in rep-orting should not just be more information, but meaningful measurement. More data does not always mean more clarity.
If you enjoy studying businesses and investing is a passion, returns may not be the only measure of success. The journey itself has value. But if the objective is to outp-erform, treat it like any other professional responsibility. Measure your performance. Compare it with a reasonable benchmark. Evaluate whether the effort is creating value.
Coming back to Roy, the heartening part is that he is proactive about his financial future and is working towards creating wea-lth. But the surprising part is that after all th-is effort, he never checked his “salary slip”.
And without looking at the outcome, how would he know whether this second job was rewarding him? Many investors are working hard as their own fund managers, unaware whether their efforts have actually rewarded them for the job. Every job deserves an appraisal, even the ones where you appoint yourself.
The writer is founding director, Circle Wealth Advisors, a Sebi-registered investment advisor; X: @saurabhsmittal
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