Wondering if Your Portfolio is Punching Above Its Weight?
Ever feel like you’re chasing a roller‑coaster of gains? Maybe your friend just bragged, “I racked up 30% on that AEM share in two weeks!” and you’re left wondering—did they really hit the jackpot or just ride the tide?
What Exactly Is “Absolute Return”?
In plain talk, absolute return is simply how much your investment grew (or shrank) over a certain time span—no context involved. It’s the headline number: “We made 25% last quarter.”
Why That Number Can Mislead
Let’s say you earned a tidy 30% on a single stock, but you doubled your stake to do it. The upside looks great, but you’re basically gambling 100% of your capital for that gain. If fate favours you, you’re lucky—if not, you’re risking the house.
Enter the Big Boss: Risk‑Adjusted Return
Think of it as the detective who looks beyond the headline. Investors use risk‑adjusted metrics to see if those gains are a comfort cushion or a high‑stakes gamble. These stats help compare two funds: one that leans on volatility for a shot in the arm and another that plays it safe with steady, moderate gains.
- Alpha – How much you outperformed the benchmark.
- Beta – How much each dollar of price swings dances with the market.
- R‑Squared – The degree of faith you can place in the market’s numbers.
- Standard Deviation – A quick check on the selling point volatility.
- Sharpe Ratio – The final verdict: return per unit of risk.
When you compare several options, make sure you’re eyeballing the same risk measures for every pick. That gives you a side‑by‑side snapshot: who’s really shouting “You win!” and who’s just shouting “I have these numbers!”
The Bottom Line of Risk‑Adjusted Evaluation
It’s all about aligning the returns with the roller‑coaster rides (volatility). A high‑return investment with wild swings is often a less attractive option compared with one that earns a respectable return but keeps the mood calm and easy do. So, the smartest investors chase returns that shine even when the market’s in a ruffle.
When High Returns Aren’t Always the Best Play
Picture the Straits Times Index—our Singapore market juggernaut—generating a steady 6 % yearly gain with a 15 % swing in volatility. Over the last decade, the risk‑free benchmark sits comfortably at 3 %. We then line up four funds to see how they stack up using the Sharpe ratio, the go‑to yardstick for judging risk‑adjusted performance.
Bottom line? Fund ABC rockets to the top of the annual returns leaderboard, but its Sharpe score is the lowest. Why? It’s the most volatile of the bunch. The lesson is clear: the “biggest” returns can hide the biggest risks.
Risk‑Adjusted Returns: A Double‑Edged Sword
- In bullish moons, a low‑risk ticker can feel like a safe bet but caps out your upside.
- High‑risk lads and lasses can deliver stellar gains when the bellwether shines, yet they do a nasty back‑flip during turbulence.
The professional crowd may split into “absolute” vs “risk‑adjusted” camps, but after two decades in the game, the differences blur. A 20‑year track record can’t be pure luck—if you’re pumping up your returns by taking heavy on‑risk, you’ll eventually taste the downside.
The Buffett Riddle
Warren Buffett—blue‑chip legend—touted a 20.5 % annual compounding beat for Berkshire vs. 9.7 % for the S&P 500 across 1965‑2018. How did he feather such funds without a sophisticated model cockpit? He laughed off the CAPM and the vanilla Sharpe ratio.
”Beta doesn’t matter,” he mused, recounting a 1973 sale of the Washington Post that would have raked in US$400 million if he’d sold the P‑chain. The irony? The cheaper asset cost far less, making the capital look riskier in dollar‑terms, but Buffett saw opportunities in volatility, not threats.
Greenblatt’s Playbook
Joel Greenblatt said, “My biggest bets aren’t the ones I think will be the most profitable, but the ones I don’t think will lose.” He turns away from price swings and zeroes in on permanent loss probability—bankruptcy odds, cash burn rates, reserves depletion.
So, if you’re eyeing a deep‑value titan trading below its liquidation worth, ask:
- What’s the bankruptcy chance?
- What’s the yearly cash burn for the next 2‑3 years?
- Will its cash reserves evaporate before that horizon?
Only when the expected upside eclipses the “big lose” risk should you take the leap.
Bottom Line: “Protect First, Reward Later”
Good money managers prioritize stellar risk controls—knowing the worst‑case and ready to act. As a retail trader, safeguard your capital, and the rewards will follow naturally.
—Original piece from Value Invest Asia. For general info only; not a substitute for professional advisory.
