Portfolio Return & the Duck

Warren Buffett says “.....When the water (the market) rises, the duck rises; when it falls, back goes the duck. . . . I think the duck can only take the credit (or blame) for his own activities. The rise and fall of the lake is hardly something for him to quack about.” Like the duck, when a fund manager's performance is like the market return he should not take the credit of the return. His performance is like the water level of a pond, rising automatically, he should take the credit only when he could perform better than the market itself or blame when performance is lower than the market return.?

Yardstick test:?

Warren Buffett has described his own way of measuring the performance of a fund. He made the yardstick, the Dow Jones Industrial Average, to compare the return. He says "While I much prefer a five-year test, I feel three years is an absolute minimum for judging performance"; that means relative performance should be measured on at least a 3-year trailing basis to be relevant and that a 5-year test is even better. Again, those that chronically fail to outperform over a 3–5 year period compared with the market return, the fund manager should rethink his capability in fund operation.

?DSEX could be the best yardstick for Bangladesh to measure and compare the performance of a fund operation. According the Buffett, if a fund manager fails to outperform over a 3-5 year period compared with the market return ( could be found by DSEX return), the fund manager really needs to rethink his fund operation.

Recent Trend of Performance Measurement:

Academicians have made performance measurement complicated by inventing different complicated ratios like alpha, beta, sharp ratios, treynor ratios and so forth. Warren Buffett has made it easier by comparing the return of a fund with the market return (Major index return) for a 3-5 year basis. In this regard, the author of the book ‘Warren Buffett’s Ground Rules’ Jeremy Miller says "Today, performance measurement in the field of equity investment has been largely corrupted and obfuscated with terms like alpha, beta, sharp ratios, Treynor ratios, and so forth. It doesn’t have to be all that complicated. Investors who decide to go the active route simply need to think it through ahead of time and commit to sticking to a measurement plan. Whether investing on your own or through a professional, monitor the 3- and 5-year trailing results and when there is chronic under-performance,?in the absence of speculative bull market runs, strongly consider making a change. The effect of long-term underperformance is just too costly."

DSEX Performance:

According to the table, the compounded market return of the Dhaka Stock Exchange has been 46.37% in the last four years. The yardstick test says if any fund return is less than 46.37% in the last four years, the fund manager should rethink the capability of fund operation and he has nothing to quack about according to the duck analogy.

He better invest in an 'index fund' and sleep.

And if the exchange does not provide an 'index fund', he better creates his own 'index fund' and sleep.