You Can’t Control What You Don’t Measure

Imagine an executive going in front of a group of investors at a shareholder’s meeting. After the executive finishes up a nice speech about the company culture, the community involvement, and the exciting new products, a shareholder raises his hand and ask the obvious question–“How are the financials?”

Now, imagine that the executive has no idea about the sales or the profits of the company. He thinks that stuff is boring and that the real excitement lies in the activity–what the organization is doing. The book keeping and bean counting is just to maintain compliance and give accountants jobs. The real business of business is starting exciting projects and getting your hands dirty. So, he offers a simplistic answer, “Well, I think we’re doing pretty good.”

If you were an investor, would such an answer suffice? Don’t get me wrong. All of those things mentioned above–organizational culture, the impact the business has on the community, and the launching of new products–are great things that organizations might want to focus on. But you can’t possibly know how well you’re doing those things unless you measure your success as you do them. If the executive above had been measuring his activities against sales and profitability, he would have had a much better answer:

“The improvement in morale from our emphasis on company culture has strengthened customer service by increasing repeat business by 30%.”

“Our involvement in the community has given our company more exposure by increasing website traffic by 45%.”

“That new product we launched has actually sold 20% less than our last new product launch within the same time frame, so we are scrapping it and going in another direction.”

You can see how measuring your activity against results can be absolutely vital in giving valuable insight into how you should be making decisions. This principle applies in business, in government, in education, in personal development, and in just about every other human endeavor–including the world of investing. That’s right, investing isn’t just about making investments–it’s about continually monitoring those investments to determine whether or not they are working for you.

Most investors will agree that controlling risk is one of the most fundamental elements of great investing. However, few investors bother to measure the riskiness of investments against their actual productivity in the marketplace–if they even know how to measure risk in the first place. The most accurate way to gauge the level of risk in a portfolio is to take the standard deviation of the changes to the investments in that portfolio. The standard deviation is a measure of the volatility in any given set of data points. The larger the standard deviation the more volatile your portfolio is. Do you know the standard deviation of your portfolio?

Measuring data isn’t just for people who love math–it’s for people who want to get the most out of life. In your investing, measuring the risk will enable you to make sure your portfolio is remaining as productive as possible. By doing so, you’ll know when you need to make changes in order to improve your investing. If you need help understanding the particulars about how to measure risk in a portfolio, feel free to reach out to us for a free consultation. We want to help you measure what matters, so you can grow where it counts.