Investment Performance Vs Investor Performance.

I've been thinking a lot recently about why it is that many of the comments that I see and hear about people's feelings about their investments seem to make no sense to me. Intuitively, they immediately strike me as illogical. It has taken a lot of thinking but I finally feel that I have managed to understand the situation.

Intuition is not actually a concept that I really like but, in truth, it does apply if you define intuition to actually be an almost subconscious expression of a persons' accumulation of knowledge, experiences and thinking. The really hard part is to somehow go back through that thinking, experience and knowledge and then to turn it into a concept that can be written down and explained. It's a challenge that I have been wrestling with. I think I have come up with a core concept that may satisfy my need to express this.

When we measure something (eg performance), we need to have it very clear in our head both what our "ruler" is and what it is we are measuring. My thesis is that it is the second of these (what it is we are measuring) that sometimes gets blurred, resulting in illogical outcomes.

Often, it is tempting to use analogies to explain something like this. However, in my experience, very few analogies actually stand up to rigorous examination. Furthermore, in this particular case, we don't really need an analogy. We are all familiar with the basics of financial investing and can therefore very easily understand the distinction that I am making - even if we have not thought about it in these terms previously.

We need to be very very clear in our own minds when we assess our return from investing whether we are measuring the performance of our investment or whether we are measuring the performance of ourselves as an investor. Both are worthwhile candidates for critical examination but we need to be very careful about which it is we are measuring in any part of our thinking.

The performance of an investment is the actual performance of the vehicle that we have invested in. In the following I will concentrate on a share investment but all of the same logic applies to any investment.

For this logical argument to stand true it doesn't matter what metric we decide to use to measure the performance of the Investment. We might use the Share Price, the Company Profits, the Dividend Payout or even the Social Benefit. It doesn't matter. The important distinguishing feature is that the Performance of the Investment is outside our control.

On the other hand, the performance of us as an investor is very much in our own hands. We decide what to invest in, how much to invest, when to invest and when to divest. These are our own decisions - nobody  forces us to make the decisions that we make. In my world that is delicious - we can congratulate ourselves when we make great decisions and learn from the other decisions. As I may have said before, unlike a job, the share market doesn't reward us just for turning up. We stand and fall on our own decisions.

In my opinion, it is very important that we have that distinction very clearly set in our thinking. We need to see the investment as something that we may have lots of information about, on an ongoing basis but have (effectively) no control over. If we want to be in the share market (and nobody forces us to be) then we have to accept that that is the way it is. The only level of control that we have is to buy and sell the shares.

What this actually means is that it is quite possible for the Performance of an Investment to be great but the Performance of an Investor in that Investment to be poor. Likewise it is quite possible for an Investor to perform well by being invested in an Investment that, itself, is performing badly. It takes no great feat of intellectual analysis to work out that, most often, this will be due to timing.

Allow me to indulge myself by looking at some examples of what I see as faulty thinking.

"This Company is crap because I bought the shares at $4.70 and now they are only worth $2.50"


The truth is, this says nothing about the Company whatsoever. All it says is that (if your measure of performance is the share price) that you made a decision that you are now unhappy with. (Incidentally, we all make decisions that we later regret. There is nothing inherently wrong about making such a decision. It's what you do next that counts. It may even be that a decision that currently appears "bad" may ultimately turn out to be "great"). Having decided that your measure of Investment Performance is the share price then you may well decide that the reason the share price has gone down is that the Directors of your Investment have done the wrong thing. That's fine - you are fully entitled to feel that way if you so wish. However, moaning and whingeing won't change a thing. All you can do is use the only tool that you have - your right as an Investor to invest (or not) wherever you see fit. Surely you use whatever tools you trust to make decisions? It doesn't matter if you use charts, fundamental analysis or whatever - the only thing that you can do is to use the tools that you believe in to make your own decisions. Nobody forces us to invest in the share market. Nobody forces us to invest in or hold any particular investment.

As I hinted at a little earlier, our performance as investors can often be ascribed to timing (or as others have opined "time in").

Here's an interesting little tidbit. If you had bought Cellestis shares in the float at 25c, ten years ago and sold them now for $2.50 then your effective annual return on your investment is a shade less than 30% per annum compound. Now probably most of us didn't actually do that. However, we have to ask - who is to blame for the fact that the share price didn't just go up a consistent 30% each year?  That would have allowed anybody to join the party on an equal basis at any time. In fact, the share price has been all over the place between the float and now. No doubt there were opportunities in there to invest with a return of greater that 30% p.a. and there were certainly opportunities to invest with returns of much less than 30% p.a. Yes, hindsight is a wonderful thing but, in the end, all we can do is to buy and sell shares as we see fit. If our timing has made a great Investment Performance (if we are measuring investment performance by share price) into a poor Investor return then surely the only person we can assign the responsibility to is ourselves.

"This is a crap Investment. As soon as I can get my money back, I'm out!"

Gee, do I have to say it? The lack of logic in this statement is astounding. Either it's a crap investment (by whatever measure you have decided to use) or it isn't. If you have used the actual performance of the business as your measure then I guess you are hoping that nobody else will notice and the share price will go up enough so that you don't feel bad about your investment. In fact, because you need to sell your shares to somebody, you are hoping to find a "greater sucker".

Which reminds me of a little story. We have all found ourselves in this situation at a party. I am standing around in group of six or so, balancing a drink and an angel on horseback, having a nice discussion. Then one by one people drift away and before I know it, I am stuck talking to the one most boring person in the room. It happened to me many times and because I'm a slow learner it took me more than three decades to realize that, in actual fact, it may have been me that was the most boring person in the room.

If, on the other hand, you are using the share price as your measure of investment performance then you are saying that the investment is crap because the share price is not going to go up but you are holding on till it does! Sounds like a recipe for disaster to me.

In the end, an Investment may be good or bad but it is our own decisions that determine whether we are successful Investors, or not. We should take credit when we make good investor decisions and learn from the times that we don't. It is all our responsibility and we cannot blame anybody but ourselves when things don't turn out to our expectations.

Once and for all.

It seems that, once again, some people are a little confused about the difference between latent TB (LTBI) and active TB. The recent announcement that WHO has endorsed the Xpert MTB/RIF fast diagnostic for active TB appears to have created some (unwarranted) nervousness amongst CST investors.

Let's see if we can clearly put this to rest once and for all.

We can look at this from a couple of perspectives, the technical distinction; and the operational impact of improved Active TB diagnosis. We will discover that improved Active TB diagnostics are actually a positive for Cellestis.

Active Vs Latent.

Whilst active and latent Tb are both the results of the same bacterium, they exist in quite different states. Active Tb is, well ... active, it is destroying human tissue and has an ultimate outcome, if untreated, of death of the patient. Fortunately, the human immune system is incredibly capable and in the majority of cases is able to effectively fight the Tb bacterium. Unfortunately, the Tb bacterium has a defence mechanism which, in my simple layman terms, is implemented by building a shell around itself to protect itself from destruction by the immune system. The result of this is a stand off - the Tb bacterium is contained and inactive, protected by its shell while the immune system patrols. In this state the Tb is termed latent and is essentially harmless. Of course if the immune system becomes compromised (age, HIV, some medical interventions) then the latent Tb will "break out" and become active. It is clearly important, then, to diagnose and treat latent Tb to avoid that future possibility.

Now, here is a really important differentiation for our consideration. When Tb is active it can be found in various bodily fluids. All of the specific diagnostics (including the Xpert MTB/RIF) for active Tb look for traces of the actual Tb bacterium. However, when Tb is latent it is hidden and cannot be found in bodily fluids at all. Latent Tb cannot be diagnosed by looking for the bacterium itself. Therefore, the only way to "find" latent Tb is to look for some other indication that it is in the body. This is what all diagnostics for latent Tb do - they look to the immune system to notify them that they are currently waging a war with some Tb.

Whilst the above is clearly a very imprecise description of the situation it does allow us to understand that no amount of tweaking will ever make a diagnostic for Active Tb diagnose Latent Tb. They are totally different diagnostic methods.

So, next time somebody announces a new test for Tb (and it happens frequently), check to see if it is a diagnostic for Active Tb. In fact, I can pretty much save you the effort - there are no records of anybody having a diagnostic for latent Tb in development other than the three existing diagnostics - TST (skin test), T-Spot (IGRA by Oxford Immunotech) and QuantiFERON (IGRA by Cellestis).

Now,

The Operational Impact.

Firstly, putting aside our own desires, we should always be pleased to hear of any progress in the fight against Tb. After all, it kills around two million people each year.

However, as it turns out, better diagnostics and treatments for Active Tb are actually of benefit to Cellestis. In low incidence countries (ie the developed world) the diagnosis and treatment of latent Tb is a worthwhile and viable exercise. Unfortunately, in less developed countries, where Active Tb is rife, the first attack on Tb has to be the diagnosis and treatment of Active Tb (Incidentally, the treatment is not expensive). In these situations, the vast majority of resources must be used in this fight. It will only be once effective control programs for active Tb are in place that resources can be turned to dealing with the reservoir of latent Tb.

We should therefore give three cheers every time we hear of a new diagnostic or treatment for Active Tb.