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Less than 1% of the population are in the same league as Buffett.
The truth is that no one can beat the market year over year the way Buffett did. His performance was magic.
In fact, he was so far ahead of his time, that I keep shaking my head in disbelief when learning about his purchases.
And then there are mutual funds.
Most mutual funds under-perform the S&P 500 long-term after expenses.
The sad part is that many people can’t be bothered looking into alternatives as long as their money is performing comparably to the market.
1-2% less? Pfft, it’s not worth my time to look around.
This is a result of relative performance comparisons instead of focusing on the more important absolute performance.
Avoid Comparing With Your Neighbor
Judging your performance relative to the market is not a bad thing. Actually, it’s the natural thing. But the red flag to avoid is solely relying on relative comparisons.
Beating the market feels great. If you beat a famous fund manager, you feel proud. But trying to beat the next person makes you focused on the short term.
By trying to achieve short term market beating results, you may well be sacrificing long term absolute performance.
In other words, absolute performance can result in under-performance relative to the market. Cheap stocks don’t work out immediately and you may just be waiting while the market continues climbing.
Warren Buffett Focuses on Absolute Performance
The media makes a bigger deal of Buffett’s performance than he does.
His intention has always been to maximize returns with low risk, not to beat the market. The side benefit is that he just so happened to thrash the market over and over again.
Famously, Buffett was ridiculed for not investing in the dot com boom. He was called “out of touch” and “old”.
But you know what happened. Buffett got the last laugh when valuation ultimately won over euphoria.
Cash is Your Best Friend
It’s tough to hold cash when the market is zooming.
However, when you are focused on absolute performance, your approach is guided by whether there are undervalued companies to invest in.
Seth Klarman goes as far as to say it is painful to hold cash.
No pain, no gain.
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