November 1, 2013

The Perspective – Fall 2013

Filed under: Investments — MikeT @ 12:09 am

At the end of the third quarter the S&P/TSX composite index had increased by 5.31% (CPMS) on a year to date basis while the S&P500 was up 23.83% (TD Securities & Bloomberg).

While there is always a desire to try to measure investment performance, doing so against a market index may not be the most appropriate measure. This is because an index is a representation, rather than a benchmark.  The representation the index makes is only possible without the factors that govern our day to day existence.  Unlike most investors the index feels no fear nor does it have taxes to pay.  The index does not put children through school, never buys a house, and never plans to retire.  An index, in short, makes a poor proxy for the goals of an individual investor over any period of time, be it short or long-term.

The factors that drive individual investment decisions are myriad; dividend payment, dividend growth, earnings per share, quality of earnings, the industry, and broadly that each of those individual criteria are improving each day.  An oft quoted maxim from popular investment icon Warren Buffet is “I never attempt to make money on the stock market. I buy on the assumption that they could close the market the next day and not reopen it for five years.”  If indeed the market were closed for five years, it would be impossible to produce a value for the S&P 500, or the TSX, or any index for that matter.

Arguably investor’s should use vastly different criteria to measure their personal portfolio returns than index returns.  Instead of asking what the index did, investors should ask if the portfolio matches their personal objectives, and if the economies that the portfolio is exposed to, are better off today than yesterday?

Investors are not the only individuals that can use benchmarks to evaluate performance, as voters can also create benchmarks to evaluate their government’s performance. In creating political benchmarks voters can prioritize matters that are important to them such as taxes, social services, healthcare, humanitarian aid, deficit reduction, and how they worked with other government parties to better the economy and country.

While Canada’s federal government has of late been mired in spending scandals a more interesting study from a benchmarking standpoint might be that of the US government, who on Thursday October 17, came to an agreement on a deal to reopen the government and raise the debt ceiling. Without this deal, it was a very real possibility that the U.S. would default on its debt, which likely would have caused a financial catastrophe.

While nothing more than a short term fix, this deal does fund the government through January 15, and raises the debt ceiling until February 7. The reality is this deal did not fix any of the underlying issues. No progress was made on the budget, tax reform and the Tea Party’s view on Obamacare. It was 16 days of posturing and bickering and accomplished nothing.

With focus now back squarely on the economy until early in the new year, American voters must now ask themselves if the government is performing the way they want it to and if it not then just as with portfolio evaluation they must reassess their options.

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