Beating the market isn’t necessarily hard. We don’t have to outperform everyone else. We just have to do better than the average. By picking individual stocks my investment returns have either matched or beaten the S&P/TSX Composite index every year since I started investing. 😀 But in today’s post I will explain why that doesn’t actually matter.
When Using Debt to Invest Pays Off
Most readers can recall that my Saskatchewan farmland value has been growing at incredible rates year after year. I’ve disclosed my stock performance many times in the past. And owning real estate in Metro Vancouver for the past 8 years has also helped to boost my net worth. However, beating the market is easy when leverage is used during a bull market cycle. Borrowing money to invest will always increase one’s investment gains, as long as the investment returns are higher than the cost to borrow, which luckily has been the case for me since I began investing. 😉
But what kind of returns would I be getting if I hadn’t used any financial leverage? Since I no longer hold any leveraged accounts at TD, there is no margin to exaggerate this account’s performance. 🙂 I have not been meticulously keeping track of my portfolio’s internal rate of return (IRR.) However, we can use the next best thing, which is a performance chart from TD.
Here’s a look at my non-leveraged portfolio for the past 3 years. It appears that my annual return was 11.57%. 🙂
Now let’s see the 5 year chart for the same portfolio. My annual gain appears to be 10.23%. 🙂
So even without using leverage, my RRSP and TFSA have performed very well relative to the blue-dotted line (TSX Composite index.) Does this mean I’m naturally gifted at picking stocks? Not necessarily. Since I hold U.S. stocks, as well as bonds, we can’t use the Canadian equity based TSX Composite index as a comparable benchmark. But that’s okay. 🙂 Frankly I’m not trying to beat any index with my investments. There is no equivalent index to compare my portfolio against.
Some people like the Weight Watchers diet, while others follow the South Beach diet. But there is no one diet fits all approach. As long as I’m doing what’s best for me and for my goals, (both financially and nutritionally) then I don’t have to compare myself with other standards out there.
Maybe it’s possible to create a custom investment benchmark for myself. But that would be very impractical. I would have to include small percentages of niche indexes, and then change the weighting when my personal asset allocation shifts. A benchmark like that would give me very little useful information anyway.
Understanding What I Own
So if I’m not trying to outperform index investors, then why do I like to actively choose individual stocks? The answer is simple. It’s because I want to understand what I’m buying before I buy it. 😀
The TSX Composite includes companies I’m not a big fan of, such as WestJet and Valeant Pharmaceuticals. As a long term investor who’s looking for capital growth for the next 30+ years, I don’t particularly like industries that have an unusually high level of bankruptcies over time. Warren Buffett once said that airlines are like “a death trap for investors.”
I wouldn’t touch Valeant either. Between all its debt and the FTC investigation this company profile just seems too risky for me. So although I’m sure WestJet and Valeant would be great choices for someone else, they would be terrible stocks for me to own based on my personal investment criteria. The advantage of being an active investor is I can choose exactly what goes into my portfolio, and leave out anything that doesn’t match up with my values. 🙂
When grocery shopping I always open the egg carton to check for any cracked eggs before putting it in my shopping basket. Understanding what I’m getting myself into before paying for something is a fundamental financial concept that I apply on a daily basis. I do this for most purchases I come across, big or small. So it seems natural for me to do the same for stocks. 😉 As investor Peter Lynch once said, “know what you own, and know why you own it.” This is how I can sleep well at night even during periods of market uncertainty.
Random Useless Fact:
According to a U.S. survey, the average millennial is expected to take more than 20,000 selfies in his or her lifetime.