What is a realistic return on value investing?

[Some-one]

Hi all,

Thanks for your input. Just to clarify I'm not into trading as my current job is very taxing and I really don't have time to keep monitoring the market and executing orders.

As for my strategy, to put it shortly is to analyze the financial statements and calculate some ratios that estimate the health of the company and also looking at profit trends and NAV / earnings ratio. I tried to run a discounted cash flow calculation like what they teach in the books, but the whole thing is very confusing and seems to require making all sorts of assumptions, so it's not very useful for me.

Is 15% very high? I mean it doesn't sound impossible to me. A few of my colleagues told me they already made more than that in just this year till now. They might be exaggerating, but so far they sound quite down to earth and not the flashy hao lian type, so I am inclined to give them the benefit of doubt.

If 15% is too high, what is the realistic return an average value investor can expect?

I guess a lot of value buddies have given useful insights. Remember that the few colleagues that you are referring to make 15% just this year alone. How about next year, subsequent years? Just last month alone, my portfolio is up 20% but this month, it goes down to just 5%. Even if you are a trader, it is highly impossible that you can time the market and buy and sell at the exact peak and trough.

Value investing is talking about long term investing that could be from 10 years to 20 years. It is never about short term buying and selling. Value investing is about finding the intrinsic value of a stock and buying it with a margin of safety. The intrinsic value of a stock has to be calculated using Discount Cash Flow Model, Dividend Discount Model, Relative P/E. Again, intrinsic value would keep on changing. There is no one way to value a stock correctly.

[karlmarx]

I hardly track the performance of my portfolio, though I do keep tabs on my individual holdings. I plan to just continue collecting and sit on it till the next bull run arrives, which is years later. That would be the best time to sell as there is a higher probability of over-valuation. Needless to say, I plan to hold everything for a suitably long period; the next three years.

Going long long makes your portfolio's performance over the next one-month or one-year irrelevant.

[Musicwhiz]

A realistic long-term return to gun for would be 8-9% per annum; consisting of about 5-6% dividend yield and about 3-4% capital gain per annum. And that's for an average value investor who purchases with his required margin of safety and assesses intrinsic value fairly accurately. For more enterprising investors, a long-term return of 10% to 12% is not unusual over say 5-10 years; but I would probably think 15% is a little too ambitious.

And oh yes, don't bother about what friends/peers/colleagues tell you about their performance in the short-term. Performance is measured in years, over bull-bear cycles and is about consistency. Those I respect are able to achieve their long-term returns while remaining true to their investment motto/philosophy.

[paullow]

A realistic long-term return to gun for would be 8-9% per annum; consisting of about 5-6% dividend yield and about 3-4% capital gain per annum. And that's for an average value investor who purchases with his required margin of safety and assesses intrinsic value fairly accurately. For more enterprising investors, a long-term return of 10% to 12% is not unusual over say 5-10 years; but I would probably think 15% is a little too ambitious.

And oh yes, don't bother about what friends/peers/colleagues tell you about their performance in the short-term. Performance is measured in years, over bull-bear cycles and is about consistency. Those I respect are able to achieve their long-term returns while remaining true to their investment motto/philosophy.

So capital appre plus dividend compundation would equate to ard 15%pa. Thats is if one does not sell any of his holdings. Or have i miscalculated? Pls correct me.

[shanrui_91]

So capital appre plus dividend compundation would equate to ard 15%pa. Thats is if one does not sell any of his holdings. Or have i miscalculated? Pls correct me.

To get 15% and above, i believe a key requirement is that you bought during a major bear market and sell when you heard aunties flocking to buy stocks. Dividend gain is very important

Of course, the more precise method is to buy when undervalued and sell when overvalued. Easier in theory than to really practice it since we are all emotional creatures subjected to greed and fear.

[Jacmar]

A realistic long-term return to gun for would be 8-9% per annum; consisting of about 5-6% dividend yield and about 3-4% capital gain per annum. And that's for an average value investor who purchases with his required margin of safety and assesses intrinsic value fairly accurately. For more enterprising investors, a long-term return of 10% to 12% is not unusual over say 5-10 years; but I would probably think 15% is a little too ambitious.

i sure would like to know who in this forum(suppose to be 1 of the most informed and savviest) has achieved 8-9% over a 10 ten period. i for one am not and whoever it is pls accept me as a disciple as i want to learn from you.

[paullow]

A realistic long-term return to gun for would be 8-9% per annum; consisting of about 5-6% dividend yield and about 3-4% capital gain per annum. And that's for an average value investor who purchases with his required margin of safety and assesses intrinsic value fairly accurately. For more enterprising investors, a long-term return of 10% to 12% is not unusual over say 5-10 years; but I would probably think 15% is a little too ambitious.

i sure would like to know who in this forum(suppose to be 1 of the most informed and savviest) has achieved 8-9% over a 10 ten period. i for one am not and whoever it is pls accept me as a disciple as i want to learn from you.

dun say who learn from who. Learning is bi way. U could pm me and we could share ideas.
Pl

[yeokiwi]

Assuming long term investment(10-20 years period), the stock selection strategy will more or less cap the return of the portfolio barring any extraordinary events that lift or dent the returns.

If the portfolio consists mainly blue chips + REITs, the expected annual return should be around 5-10% since the valuation of these stocks are widely covered and the chance of undervaluation is low. Besides that, the chance that these blue chips will double or triple in revenue is also low.

If the portfolio consists of well researched mid-caps and small-caps, the expected annual return will probably be higher (> 10%) since these groups are viewed to be risker with less analyst coverage. Fund interest in these groups are lower and investors are likely to be able to collect at lower PE or PTB ratio. The probability for these companies to double and triple their revenues is higher than typical blue chips. However, the probability of losing money in these companies is also higher.

As everyone knows, the return of a portfolio is directly correlated to the risk.
In a way, value investing is to take a calculated risk to achieve a higher return than market return.

[Jacmar]

Assuming long term investment(10-20 years period), the stock selection strategy will more or less cap the return of the portfolio barring any extraordinary events that lift or dent the returns.

If the portfolio consists mainly blue chips + REITs, the expected annual return should be around 5-10% since the valuation of these stocks are widely covered and the chance of undervaluation is low. Besides that, the chance that these blue chips will double or triple in revenue is also low.

If the portfolio consists of well researched mid-caps and small-caps, the expected annual return will probably be higher (> 10%) since these groups are viewed to be risker with less analyst coverage. Fund interest in these groups are lower and investors are likely to be able to collect at lower PE or PTB ratio. The probability for these companies to double and triple their revenues is higher than typical blue chips. However, the probability of losing money in these companies is also higher.

As everyone knows, the return of a portfolio is directly correlated to the risk.
In a way, value investing is to take a calculated risk to achieve a higher return than market return.

Hi yeokiwi, i don't mean to be cynical but i have tried all the strategies you have listed. maybe i am a louzy investor and don't know how to execute it right.b4 the GFC my returns was >15% for several years and I tot i was a great investing genius. Well the GFC drove my returns to mean reversion. Don't underestimate the power of reversion to the mean.

[yeokiwi]

Hi yeokiwi, i don't mean to be cynical but i have tried all the strategies you have listed. maybe i am a louzy investor and don't know how to execute it right.b4 the GFC my returns was >15% for several years and I tot i was a great investing genius. Well the GFC drove my returns to mean reversion. Don't underestimate the power of reversion to the mean.

Assuming long term investment(10-20 years period), the stock selection strategy will more or less cap the return of the portfolio barring any extraordinary events that lift or dent the returns.

Well... I agree with you and that is why I put the above sentence ahead of the stock selection strategy.
A higher return than norm will require some form of luck and good timing.

After the GFC, I realised that a good bond-stock ratio (30-70 or 20-80) in the portfolio is probably the only ass-saving technique when any extraordinary event happens. That 20-30% will hopefully be able to cover up the losses in the stock portfolio when the market recovers.
But obviously, it lowers the return during normal time.

Anyway, I adopt no gearing approach and so I only slept with heart pain during GFC but still could have a good sleep..