Percentage Means Nothing When You’re Investing

While reading an annual report, I realized something. Businesses make decisions today, and the results of that decision will not make itself clear not until a few years down the road… Meaning, if they made a decision to increase revenue today, laid out those plans, execute them, the result of those actions will not be visible until a few years down the line. They don’t know when, nor for how many years they would have to wait, but they hope to see a good result, which is also not guaranteed. They are investing.

There are a lot of uncertainties and a lot of waiting involved. Business takes a lot of patience. And most successful businesses are those that think this way. They bet today and hoping those bet would pay off in the long term. The word here is long-term. They would also sacrifice short term gains just to have more of it in the future.

With this in mind, why do we care if this company made 20% this year? And on the inverse, why do we care if it lost -20% this year or more in its stock price? If in the long-term it will average out to around 15% or so compounded? You still got a good percentage, does it matter if you made 50% this year and -50% the next? It doesn’t.

The reason I’m telling you this is that, my portfolio is up around 23% this year. With my investments with ACEN and MWC, it really carried my entire portfolio. But I realized that this is not something to celebrate about. The stock price may go up and down, and it just so happen that it went up more this year than the previous year or the next year. It doesn’t tell us anything about the business. Its just in a way, just a temporary measure of how we did this year. And not in anyway permanent nor does it reflect the true value of the companies in our portfolio. Price is just that… What other people are willing to buy/sell it for. It means nothing value wise.

On managing a portfolio, percentage gains means nothing as well. 100% in a stock means nothing if you only put P8,000 in it. How hard is it really to lose P8,000 on a gamble stock? Its just nothing. So therefore, making 100% in a stock with only P8,000 invested is not the same as 100% with P1,000,000 invested. The latter is a much harder feat. And the percentage gains of both are different, even though they made both 100%.

Why is it harder then? When money gets bigger, drawdowns are much painful, you can’t move as swiftly as someone with less money, you move prices. Think about it. Isn’t losing P1,000,000 much more painful than losing P8,000? I think that’s the reason why traders post screenshots of their portfolio with gains, but cover the number of shares or their market value. There’s only a tiny amount of money involved. They don’t want you to know that they only invested small amounts in it. Small enough not to be bothered even if it gets lost entirely. On the other hand, if the gamble proved to be successful (you can gamble a lot of stocks with P1,000 each) and it made a gain, they can just hide the number of shares / market value and show the percentage enticing other people to attend their seminars. Burrowing the evidence for the others that fail. Its a low risk marketing ploy. Taking advantage of people’s view that all percentages are equal. 100% gain is a 100% gain right? Wrong… 100% gain on a P8,000 is easier than 100% gain on P1,000,000. But you will never know that, because its hidden. 😀

If percentages mean nothing, how do we decide if a strategy works?

You look at the long term returns by decades. That’s the only way to know if an investing strategy works. If you made good returns with the least amount of risk, even if you beat the index or not, that I think is a good investing strategy. As long as you keep investing, and earning a couple of percentage points above inflation, and didn’t take too much unnecessary risk for the same amount of gain elsewhere, and you survive at least 10 years, that I think is an accomplishment in itself. And you should be proud.

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