What is a realistic return on value investing?

[corydorus]

Low risk may not mean Low Return. Neither do High risk gives you high returns especially when you buy structured products where they they may "Steal" a big chunk of your investment as fees or some hanky-Panky stuff which you have no control on. Sorry for leading a little away from the discussion ...

[Temperament]

Low risk may not mean Low Return. Neither do High risk gives you high returns especially when you buy structured products where they they may "Steal" a big chunk of your investment as fees or some hanky-Panky stuff which you have no control on. Sorry for leading a little away from the discussion ...

No! i don't think so. i agree with you.

{MORE INFORMATION IS NOT NECESSARILY A GOOD THING

Many investors give little or not thought as to how they actually go about making decisions. One bias they have is: I know better, because I know more. The illusion of knowledge is the tendency for people to believe that the accuracy of their forecasts increases with more information. The simple truth is that more information is not necessarily better information. Another bias: I can make a judgment based on what it looks like. Companies that have seen growth in the previous five years are forecast by analysts to continue to see very high earnings growth in the next five years.
Analysts are effectively looking at the company’s past performance and saying this company has been great, and hence it will continue to be great.
Analysts fail to understand that earnings growth is a highly mean-reverting process over a 5 year period.
Effectively, analysts judge companies by how they appear, rather than how likely they are to sustain their competitive edge with a growing earnings base. Another bias of investors: that is not the way I remember it.
Our minds are not supercomputers, or even good filing cabinets.
They bear more resemblance to post-it notes that have been thrown into the bin, and covered in coffee, which we then try to unfold and read. People are more likely to recall vivid, well-publicized or recent information.
Simonsohn Et Al hypothesizes that one reason for overweighting of direct experience is the impact of emotion. “Directly experienced information triggers emotional reactions which vicarious information doesn’t.” investors experience will be a major determinant of their perception of reality.}

Nb:-
So the realistic return of of your investment is no difference from your direct experience.
i don't know what i am categorized as an investor, but utd return is 8 to 10 % only since day one. i admit sometimes i missed recording dividends.

[GiraffeValue]

W.B said there is no correlation between risk and reward. But there is strong relation between risk and ignorance.

[Temperament]

W.B said there is no correlation between risk and reward. But there is strong relation between risk and ignorance.

For that matter, if you don't know what you are doing even crossing the road is very risky.

[corydorus]

W.B said there is no correlation between risk and reward. But there is strong relation between risk and ignorance.

For that matter, if you don't know what you are doing even crossing the road is very risky.

Like to add that there is also strong relation between risk and greed.

[tanjm]

It is important that the hurdle rate you choose match the risk profile of your investments. If you are a low risk taker (with a matching portfolio), you should set the hurdle rate lower and vice versa.

My thinking is somewhat along this line but different.

If you do not want to put in the time and effort, you should set the expectation lower. Vice versa. Maybe that's what realistic is about.

My thinking is : is what I do better than putting my investments in a professional fund with similar risk characteristics? Then your hurdle rate should be set appropriately. For example, if your (model) portfolio is 30% local reits, 20% local blue chips, 20% S&P index, and 30% sgd bonds you surely should set the appropriate hurdle rate (e.g. 5%).

On the other hand, if your model is 50% sti index and 50% small cap! then maybe your hurdle rate should be 15% for example.

[Temperament]

YOUR HUDDLE RATE

{Investors, naturally, want the highest return possible on their investments — but for a retiree, this could be a recipe for disaster.
In my view, you should never take more risk than is necessary to accomplish your financial goals.
If you do decide to take on extra risk, you're being greedy. Despite what Michael Douglas said in the movie Wall Street a few years ago, greed isn't good.
It isn't about becoming rich quick ...
At Money Matters, our goal isn't to make our clients rich quick. It’s to keep them from becoming poor. Taking on too much unnecessary risk is one way they can become poor. To determine how much risk is appropriate for each client, we calculate what we call a "hurdle rate" for each of them. By considering taxes, inflation, and their spending habits, we figure out the rate of return they need to earn on their money; the end goal being that they will have enough money for the rest of their lives. We can then construct a portfolio that gives us the highest probability of achieving that hurdle rate with the least amount of risk.
Don't get greedy
[b]If you don't know your hurdle rate (or choose to ignore it), you put yourself at risk of losing your retirement.[/b] Consider this real life example:
In 2002 , a 70-something-year-old couple came in to see me, and told me their story. In 1998, they had a million dollars. Their cost of living was $50,000, and they had $15,000 coming to them from Social Security. This couple's investments needed to generate $35,000 a year to make up the difference. $35,000 is 3.5% of a million dollars, so leaving some room for inflation, their hurdle rate was about 4%. If they made 4%, they would probably cover their cost of living for the rest of their lives.
They had their money in Treasurys, CDs and cash. Interest rates at the time were 6.5%, so they were making $65,000 a year. They were well above their hurdle rate with relatively no risk. They spent $35,000 of their returns a year and banked the other $30,000. If you look at their situation mathematically, you can see they would never run out of money.
But what did they do? They saw that the technology stocks were making 20%-25 %. All of their friends were telling them about all the wonderful returns they were making.They started thinking about all the money they were leaving on the table by only making 6.5%. The market kept going up, and after two years, the couple finally succumbed to the mermaids' song. They put all their money into technology stocks at the beginning of 2000. We all know what happened next. In a little over a year, the dot-com bubble burst. The couple lost 90 % of their money. Their million dollars became $100,000.
Moral of the story
Don't take more risk than you need to accomplish your goals. It makes zero sense to take one iota more risk than you need to. If you can win the game with 4%, be happy. You're fortunate if that's all you need to make. You can invest very conservatively. You don't have to take a lot of risk. That's a good thing. Don't get mad at yourself because you're only making 6% when you could make 20%. Instead, be happy that making 6% exceeds your hurdle rate.
NB:-
i think the moral of story is not only applicable to retiree but to everyone.
So where is your HUDDLE RATE?
Shalom.

[Temperament]

W.B said there is no correlation between risk and reward. But there is strong relation between risk and ignorance.

For that matter, if you don't know what you are doing even crossing the road is very risky.

Like to add that there is also strong relation between risk and greed.

i think you can mitigate greed to a safer level (less risk) if you know where is your HUDDLE RATE.

[karlmarx]

I have always had a hard target (say, 10% p.a.). But recently, I have been re-thinking whether it makes more sense to instead to have a target that is x% above the stock index, or interest rate. The rationale is that both the stock index and interest rate reflect the market-average/risk-free rate, and hence, reflect the 'difficulty' of generating returns, during any particular period.

For example, wouldn't achieving a 10% p.a. return on your stock picks be more difficult when interest rates are 1%, than when it is say 7% (during the 70s-80s)? Although 10% might not look like much, it does mean that this investor is able to grow his/her money much faster than the others who are say, earning 3% from the index, or 1% from savings deposit.

IIRC, during WB's early career, his target was to outperform the index by 5 or so percentage points. I think this might a better approach than having a hard target, which may or may not be realistic, or reflective of one's ability to perform (better than market rates).

[dreamybear]

Personally, I have my doubts whether value investing is still "worth" it. In the best case, how many multi-baggers do we expect in a lifetime ? And even if we managed to hit several multi-baggers, how much did we put in the stock ? Assuming a $50k investment, hitting a 5 bagger will "only" return $250k which may not even be able to buy a 5 room flat. If we hit 3 multi-baggers, and assuming we are willing to "risk" $50k on a single counter, then yes, it is probably one FOC 5 room flat, but still not quite the much coveted private property which we can "own". Furthermore, the cost of living in S'pore especially those having children / aged in-need parents is pretty high, e.g. paying $1k a mth for tuition is not uncommon, day care services for seniors are not cheap either. This means any spare cash to invest is limited, and any dividends received will probably go towards relieving cost of living pressures. In the worst case, what if the investment(s) turned out to be bad ? It cld mean wiping off years of savings.

To be clear, I have great respect and admiration for the legendary investors e.g. likes of WB, Graham, Lynch, Fisher, etc etc. But they lived in an era when value investing was still relatively confined to a selected group of people, and also when the world economy still has much room to grow.(I do not forsee interest rates going back to the good old 5-6%(or more) in developed economies.)

Today, there are fund managers aplenty, countless literature, an abundance of investing websites, an army of investment education providers, etc. It's pretty much many people chasing the same pot(s) of gold while assigning different valuations, inevitably chasing up the share price. Furthermore, there is so much cheap money around that risk-reward is somewhat distorted. Thus, it is now so much harder to identify and buy superior undervalued securities.

It reminds me of properties/shares when S'pore was still in 3rd world status. Most people who bought assets(esp properties) then probably had all made money if they held long enough, but of course, since not all things are created equal, some assets appreciate much more than others, enriching their owners in varying degrees.

Instead of trying to identify the next exceptional undervalued gem(value investing), it may be more efficient & productive just accumulating strong critical blue chips(e.g. DBS which "cannot afford to fail" without severe implications to S'pore) whenever recession strikes, and hold them "forever" while collecting dividends yearly.