How many times has this happened to you? You're at a social 
function and the conversation turns to investing. Pretty soon, 
people are comparing how well their investments are doing. As 
you might imagine, being an investment advisor this happens to 
me a lot. However, I recently had an experience with it that 
startled me.

Bob, one of the guys I was chatting with at a party, asked what 
kind of returns I had made for my clients with my methodical no 
load mutual fund strategy during the past year. I replied that 
they had unrealized gains of slightly over 29%, after management 
fees, for the 8 months that we were invested. 

Bob countered with a smirk that he had made a 40% return. I 
raised my eyebrows and told him that was darn good—and suggested 
that maybe he ought to be managing my money. At that point we 
were interrupted and, as the evening went on, I began to wonder 
exactly how Bob had gotten his great return.

I cornered him a little later on and, upon digging a little 
deeper, the story looked somewhat different. Yes, he had made 
a 40% return on a mutual fund he had some money invested in, 
however, we were comparing apples and bananas. 

He had a total portfolio of $100k. Being cautious, he had 
invested only $10k into a mutual fund, from which he profited 
$4k after he sold it. The balance of his portfolio ($90k) was 
sitting in a money market fund earning some 0.35% per year. 

So, while he had made 40% on 10% of his investment, he had 
only made 4.35% on his whole portfolio. My methodology was 
also focused on protecting my clients' investments and it had 
increased their entire portfolio 29% (unrealized). That would be 
an apple to apple comparison when measuring my returns against 
his. Bob's one fund realized 40% return. However, had I 
approached it the same way Bob had, I could have described one 
of the funds I used that had realized over 49% for the same 
period.

Actually, Bob's not-so-good-news story didn't stop there. Bob 
admitted to having followed the losing Buy and Hope strategy 
through the bear market of 2000 and had finally sold out at a 
50% loss a year ago, before committing $10k to a mutual fund 
investment. 

I was pleased to be able to tell him that my methodology had 
gotten my clients out of the market before the bear took his 
big bite, and they suffered only minimal losses before finding 
safety in money markets accounts. And when my trend tracking 
figures directed us to move back into the market, they still 
had most of their money poised to start earning for them again 
— which it did and very nicely, thank you.

The moral of the story is to look past the surface and don’t 
take any numbers thrown at you at face value. Remember, most  
people returning from a weekend in Las Vegas will shout about 
their winnings and mumble about their losses.

© Ulli G. Niemann