But do they outperform the market? - AXIAM Capital Management

“But do they outperform the market?”

This question is often used to determine the merit of an investment opportunity. But what does it mean to “beat the market” and is it even a useful measure?

What is “the market”?

When people talk about “the market”, they are referring (knowingly or unknowingly) to a market index in a particular geography. Common indexes include the S&P 500, the Dow Jones Industrial Average and the JSE All Share index.

Is it possible to outperform “the market”?

Warren Buffett has consistently outperformed the market in the 53 years he has owned Berkshire Hathaway. Using the S&P 500 (an index of the top 500 shares in the USA) as the benchmark of the market performance, Buffett shows in the 2017 Letter to Shareholders that Berkshire Hathaway has shown a compounded annual gain of 20.9% vs 9.9% attained by the S&P500.

Simply put, a $1 investment in both Berkshire Hathaway shares and the S&P500 in 1965, the Berkshire Hathaway investment would be worth $2,404,748 today, and the S&P500 investment would be worth $15,508. These results show it is possible to outperform the market.

What is your time interval?

Determining whether your investment has outperformed the market requires that you set a time interval. What happens over 1,3,5,10 and 20 years?

Can you outperform the market and lose money?

Yes, you can. If there is a crash like in 2008, you could lose a lot of money, but your losses may be less than the market benchmark that you are using as a relative performance measure. It may not feel so good to outperform the market with a 20% loss on your investment when the market is down 40%.

Measuring investing success

We prefer to consider the timeless investment wisdom of the great investors.

“The best way to measure your investing success is not by whether you’re beating the market but by whether you’ve put in place a financial plan and a behavioral (sic) discipline that are likely to get you where you want to go. In the end, what matters isn’t crossing the finish line before anybody else but just making sure that you do cross it.”

Benjamin Graham

Beating the market but failing to achieve your goals is pointless.

The attainment of your financial goals defines investment success. Investors need to achieve a certain level of income to live where and how they want to live. For that, they need to invest capital over an extended period according to a strategy aligned with the outcomes they desire.

At AXIAM, we prefer to work with our clients to set investment goals and develop a strategy that meets those goals. Our primary objective is to turn our clients’ current capital into an annual dividend. We focus on the absolute returns and measure their dividend income growth.

We have spent many years growing wealth inspired by the wisdom of successful investors. We do this by owning shares in companies, that pay regular dividends, that own great brands that are known and used around the world daily. We intend to hold, and ideally never sell, the assets we buy. We also believe in sharing knowledge with our investors so that they may grow as their wealth does. To learn more about our investment philosophy, sign up for our newsletter, or contact our fund management team to invest.