======Performance======
In the world of investing, performance is the ultimate report card. It measures the success of an investment or an entire [[portfolio]] over a specific period. This is most commonly expressed as the [[return on investment]] (ROI), which calculates the financial gain or loss relative to the initial cost. However, a single number rarely tells the whole story. True performance analysis goes beyond a simple percentage. It demands context. Was the return achieved by taking on stomach-churning levels of risk, or through a calm and steady strategy? How did it stack up against a relevant [[benchmark]], like the [[S&P 500]] index? What was the time frame? For a [[value investor]], the most important context is how the investment's return reflects the underlying success of the business itself. After all, a rising stock price driven by pure speculation is just noise; a rising stock price driven by growing profits and a strengthening competitive advantage is the beautiful music of successful long-term investing.
===== How Is Performance Measured? =====
While it's tempting to just look at the final number in your brokerage account, understanding //how// that number came to be is what separates a savvy investor from a gambler.
==== The Basics: Absolute vs. Relative Return ====
The first layer of analysis involves two simple but distinct ideas:
  * **Absolute Return:** This is the most straightforward measure. If you invest €1,000 and your investment grows to €1,150 over a year, your absolute return is €150, or 15%. It's the pure profit-and-loss figure, independent of what anything else did. While easy to calculate, it lacks crucial context.
  * **Relative Return:** This measures your investment's success //compared// to a specific benchmark. If your portfolio returned that same 15%, but the overall stock market returned 20%, you actually underperformed on a relative basis. Conversely, if the market fell by 10% and your portfolio only fell by 2%, your absolute return is negative, but your relative performance is excellent. This helps you judge whether your investment choices are adding value beyond just riding a market wave.
==== Digging Deeper: Risk-Adjusted Return ====
Achieving a high return is great, but not if it required an insane amount of risk. A professional gambler might have a huge winning night at the casino, but you wouldn't call it a sound investment strategy. This is where risk-adjusted returns come in. They help you answer the question: "How much return did I get for the amount of risk I took?"
  * **[[Sharpe Ratio]]:** The king of risk-adjusted metrics. It essentially measures your return per unit of risk (typically defined as price [[volatility]]). A higher Sharpe Ratio is better, as it suggests more efficient returns. For example, two funds might both return 10%, but the one with the higher Sharpe Ratio likely provided a much smoother ride to get there.
  * **[[Alpha]] and [[Beta]]:** These two Greek letters are cornerstones of [[Modern Portfolio Theory]].
    - **Beta** measures an investment's volatility relative to the market as a whole. A beta of 1.0 means it moves in line with the market. A beta of 1.2 means it's 20% more volatile, and a beta of 0.8 means it's 20% less volatile.
    - **Alpha** is often considered the holy grail. It represents the excess return an investment generates beyond what would be expected based on its beta. A positive alpha suggests the investor or fund manager has skill in picking winners, while a negative alpha suggests they've underperformed the risk they took.
===== The Value Investor's Perspective on Performance =====
For a value investor, the conventional obsession with short-term, market-relative performance can be a dangerous distraction. The focus shifts from the stock's price to the business's value.
==== Business Performance vs. Stock Performance ====
As the legendary [[Warren Buffett]] famously said, "In the short run, the market is a voting machine but in the long run, it is a weighing machine."
  * **The Voting Machine (Stock Performance):** In the short term, stock prices can swing wildly based on news, rumors, and crowd psychology. This is the market "voting" on a stock's popularity, which has little to do with its long-term worth.
  * **The Weighing Machine (Business Performance):** Over the long run, a company's stock price will inevitably gravitate towards its intrinsic value, which is determined by its ability to generate cash and grow earnings. This is the market "weighing" the company's actual substance.
A value investor measures performance first by the "weighing machine." Are the company's revenues and [[free cash flow]] growing? Is its [[economic moat]] widening? If the business is performing well, the stock performance will eventually follow.
==== The Perils of Short-Termism ====
Constantly checking your portfolio and judging its performance against the market on a quarterly or even yearly basis is a classic behavioral trap. It leads to what's known as "quarterly performance anxiety" and encourages you to do the exact wrong thing: sell solid companies during temporary downturns and chase hot stocks at their peak. True value investing performance is measured over a full [[market cycle]], typically 5-10 years, which gives a sound investment thesis the time it needs to blossom.
===== Capipedia’s Quick Guide to Evaluating Performance =====
So, how should you, the individual investor, think about performance in a practical way?
  - **1. Define Your Yardstick:** Before you invest a single dollar, decide what your benchmark is. If you're buying a portfolio of large U.S. companies, the S&P 500 is a fair comparison. If you're investing globally, use a global index like the [[MSCI World]]. Comparing your results to the right benchmark is key to an honest assessment.
  - **2. Think in Years, Not Days:** Commit to evaluating your performance over a long-term horizon. Don't let a bad year or two spook you out of a good long-term strategy. The real test is how your portfolio performs through both bull and bear markets.
  - **3. Remember the Goal:** Beating the market is a great ego boost, but the ultimate measure of performance is whether you are on track to meet //your// financial goals. Is your portfolio growing at a rate sufficient to fund your retirement or pay for your kids' education? This is the performance that truly matters.
  - **4. Ask About Risk:** Don't just ask, "How much did I make?" Always follow up with, "And how much risk did I take to make it?" A portfolio that delivers a smooth, steady 7% return is often far superior in the real world to one that rockets up 25% one year and crashes 18% the next.