Nobel prize winner in Economics Robert Shiller was interviewed in the Wall Street Journal. The whole thing is worth a read but there was a telling set of questions when it comes to active investing and performance measure. From the David Wessel interview:
Q: Do you think of yourself as someone smart enough to pick winners in the stock market?
A: Well, I actually think I’m smart enough to pick winners. I’ve always believed in value investing. Some stocks just get talked about, and people pay all sorts of attention to them, and everyone wants to invest in them, and they bid the price up and they are no longer a good buy. Other stocks, they are boring. There is no news about them—they are making toilet paper or something like that—and their price gets too low. So as a matter of routine, you buy low-priced stocks and sell high-priced stocks.
Q: What’s your personal track record: Are you more up than down?
A: I have never done a personal analysis. I have to do that. But I believe that I’ve done well in timing the market, although not perfectly.
The interesting thing isn’t that Shiller actively invests part of his portfolio. It is consistent with his belief in less than efficient markets. What is notable is that he has not tracked his performance in any meaningful way! That is at a bare minimum a requirement for investors who choose to move away from index funds.
Very early on in the life of this blog we wrote about the importance of measuring your portfolio performance and expanded on it in the book when we noted that the omnipresent S&P 500 is not necessarily the correct benchmark.
Professional portfolio managers who are worth their salt will measure their portfolio’s performance on a continuous basis. Individual investors don’t need to be as performance obsessed as professionals do, but performance measurement is an important part of any portfolio process. As an investor, there are two components of performance measurement that you need to keep in mind. The first is that you have to measure (not ignore) your portfolio performance. The second is that your benchmark is not the S&P 500. Understanding where your portfolio stands relative to a relevant financial benchmark and where it stands relative to your own personal goals is key to keeping you on track.
If you are not measuring your own performance, no one else will do it for you. Prof. Shiller is obviously is smart guy but his failure to do even a rudimentary performance analysis shows you that it requires more than just brains to be a fully realized investor.