Today, it is normal to measure the investment performance of a stock, based on stock price movements. For instance:
If a stock went up in price, the stock is viewed to be a ‘Good Investment’.
If a stock comes down in price, the stock is viewed to be a ‘Bad Investment’.
Based on this, do we buy more shares of a stock that is going up in price? Or, do we sell off shares of a stock that had declined in stock price to cut loss? Thus, in this article, I would like to share how I assess the performance of my stocks and make better investment decisions on them.
My Basis of Measuring Performance
First, it is helpful to reiterate my investment objectives, which are as follows:
I intend to earn consistent growth in dividend income from my stock portfolio. I also would like to enjoy long-term sustainable capital growth and have some of my wealth diversified into other major currencies of the world.
To meet my objectives, I need stocks, where their business models are resilient, their financials are intact, and their management are driven for growth. If these stocks remain as such, they could deliver consistent growth in revenues, profits, and operating cash flows, which in turn, could pay increasing dividends to all its shareholders continuously.
So as an investor, I would measure the stocks that I had invested in based on:
1. Latest Profitability (Financial Results).
2. Latest Balance Sheet Strength (Financial Strength).
3. Latest Progression of Their Growth Initiatives.
If my stocks continue to be highly profitable, have strong balance sheets and do make progress on their growth initiatives, I would keep them. If, over time (let’s say 2 years), I find that my stocks had deteriorated in business fundamentals, as an investor, I may dispose of their shares to cut losses.
So, I assess stock performance based on its ‘long-term business fundamentals’.
How Often Do I Assess Stock Performance?
Answer: Once per quarter.
This is because most stocks release their financial statements once a quarter. To illustrate, let me offer a case study on a stock that I have invested in 2016. Over here, let’s call this stock ‘REIT A’. Here are some background:
On 23 December 2016, I invested in REIT A at S$ 1.04 an unit (after brokerage). At that time, REIT A had 124 properties valued at S$ 5.3 billion (Q2 2017). It has made S$ 183.9 million in distributable income and thus, had paid 7.38 cents in Distributions Per Unit (DPU) in the last 12 months. Its financials are as follows:
In Q2 2017:
After I bought REIT A, it released its financial results for Q3 2017. From it, I discovered that REIT A earned S$ 46.8 million in distributable income and had declared 1.87 cents in DPU. As REIT A remained profitable, I decided to keep it.
Soon came Q4 2017, Of which, I discovered that REIT A earned S$ 46.6 million in distributable income and paid out 1.86 cents in DPU. As it is profitable, I keep it.
Fast forward to today (Q2 2023), REIT A’s distributable income and DPU, since I’ve invested in December 2016, are as follows:
Presently (Q2 2023), REIT A has 186 properties worth S$ 12.9 billion. Over the past six years, it had expanded and delivered more profits and dividends to its investors. It had done well in the perspective of business performances and I had received a total of 23 DPU from REIT A to-date (24th DPU is on the way).
But What if the Stock Price Drops?
Let’s look at REIT A’s 5-year price chart:
Some questions:
1. Do the price increments indicate improvements in REIT A’s fundamentals?
Nope.
2. Do the price declines indicate deteriorations in REIT A’s fundamentals?
Nope.
3. What did I do when REIT A increased in stock price?
Nothing. Just collect my DPUs.
4. What did I do when REIT A decreased in stock price?
Nothing. Just collect my DPUs.
5. Why didn’t I sell REIT A when it was trading at S$ 2+ per unit?
I believe this is because I did not bother about selling my stocks for capital gains and I only focus on income production. As long as REIT A is income productive, I’m glad to hold onto it.
6. What if REIT A falls below S$ 1.50 per unit in the future?
Once again, for as long as it remains income productive, I’ll keep mine.
7. Should you invest in REIT A?
Like always, I won’t answer this question as you should only invest after you did your due diligence which involves a proper assessment on its fundamentals and its stock valuation. Here, if you can’t be responsible and take ownership of your own investment decisions, it is best that you don’t invest in stocks. Just because I bought mine, it is never a justification for you to buy yours.
Besides, I bought mine at S$ 1.037 per unit. If you buy yours at a different price, your returns will definitely be different from mine.
Conclusion: How to Measure Stock Investment Performance?
Personally, I would assess stock performance based on stock’s fundamentals. To me, as an investor, my objective is to keep on increasing dividends (not gains on trading) over time from my stock portfolio. So, as long as the businesses are still productive and profitable, I’m happy to keep mine.
In a nutshell, your objectives will determine how you assess stock performance.
Hence, it is important to first identify yours first before investing in stocks. As of now, if you intend to build a portfolio that earns you dividends year-after-year, I have prepared a free training session for you as follows:
Link: How to Build a Stock Portfolio that Pays Increasing Dividends?
