The following story has nothing to do with Cheesehead. The people and events may or may not be real.
Last week, we attended an opening gala and met several interesting people. Three of them were sitting at our table.
Fred: "Over the last five years, my portfolio has made at least $5 million."
FD: "That's impressive. What were you invested in?"
Fred: "I started with $10 million and kept it split 50/50 between PDI and PTY."
FD: "While making $5 million sounds great, your portfolio didn't actually perform that well. Based on the numbers, it lagged money market funds over the same period."
A gentleman named John joined the conversation.
John: "My portfolio has made about $800,000 a year over the last five years."
FD: "That's impressive. What were you invested in?"
John: "I started with $20 million and kept it in CDs."
FD: "That's roughly a 4% annual return. Money market funds returned more than 18% cumulatively over much of that period, and inflation exceeded 23%. After accounting for inflation, your purchasing power barely increased."
Then a young woman named Madison joined us.
Madison: "I worked for Intel. About a year ago, I decided I could make a lot more money. I didn't have as much as you two, but I invested my entire $3 million portfolio in my company stock."
FD: "Let me check my phone. Wow. Your $3 million has grown to more than $15 million in a year. You passed Fred in just twelve months." (See chart.)
So what can we learn from these examples?
- The most important investment metric has always been TR (Total Return) and always will be. For many investors, especially retirees, risk-adjusted return is also important, which is where measures such as the Sharpe ratio and SD become useful.
- If your portfolio is large enough, almost any strategy can appear successful. You can be invested in 100% stocks, 100% CDs, money markets, or something in between and still accumulate significant wealth. A large portfolio by itself does not prove investment skill.
- Dollar gains can be misleading. Making $5 million sounds impressive, but without knowing the starting portfolio size, the return percentage, and the risk taken, the number tells us very little.
- A $500,000 gain on a $1 million portfolio is very different from a $500,000 gain on a $20 million portfolio. Percentages matter far more than dollar amounts when evaluating investment performance.
In investing, context matters. Total return, risk, and starting capital tell the real story—not the size of the dollar gain alone.
In real life, I actually know a guy like that.
Bill sold his company for $15 million back in 1993. Since then, he's kept roughly 90% of his portfolio in municipal bonds and the remaining 10% in the S&P 500.
Of course, he did very well financially and never had to worry about money again. But his success was driven primarily by starting with a very large portfolio, not by generating exceptional investment returns.
That's an important distinction. He "made it," but his investment performance was far from extraordinary; in fact, it trailed an average portfolio with 50/50 or even 30/70.
