Einhorn on Investing Benchmarks

I've said it before, and I'm sure to say it again, understanding how great investors think about investing is much more valuable than discovering their latest pick.

Here, from page 17 of Fooling Some of the People All the Time, is Einhorn sharing what he thinks an appropriate investing benchmark is--and why:

"We consider ourselves to be absolute-return investors, and do not compare our results to long-only indices. That means our goal is to try to achieve positive results over time regardless of the environment.

I believe the enormous attraction of hedge funds comes from their absolute-return orientation. Most long-only investors, including mutual funds, are relative-return investors; their goal is to outperform a benchmark, generally the S&P 500.

In assessing an investment opportunity, a relative-return investor asks, 'Will this investment outperform my benchmark?' In contrast, an absolute-return investor asks, 'Does the reward of this investment outweigh the risk?'

This leads to a completely different analytical framework. As a result, both investors might look at the same situation and come to opposite investment conclusions."

That excerpt is worth reading (at least) twice. Notice how the benchmark Einhorn uses focuses his attention on the nature of an investment itself and in particular its risk-reward profile.

Some questions to leave you with:

Is this focus on the facts of a particular investment (and how one comes to conclusions based on them) peculiar to Einhorn--or is it a method shared by other great investors?

What is your benchmark? For instance, are you primarily focused on specific companies and on learning everything about them, or on what others as a whole are doing and the returns they've earned year-to-date?