How to think about performance vs. index

I know most investors (incl. Warren Buffett) compare themselves vs. index. This is of course fair and relevant in many ways, especially in deciding if you should spend time in allocating capital yourself or handing it over to someone else. However, I am more inclined to set an absolute long-term target for my total return, and preferably after adjusting for inflation. I believe e.g. Seth Klarman calls this an 'Absolute-Performance Orientation'. Kids, when you become old enough to have amassed some experience (i.e. having made a few mistakes on your own...) from investing (my guess would be somewhere in your early 30's) and can judge how interested you are to spend time on investing, then you should set your own absolute long-term return target.

Right now I am operating with a minimum target level of 7% total return (in nominal terms, i.e. without taking inflation into account) over the long-term (20+ years). In real terms I expect that to be about 5,5% total real return (i.e. after inflation), assuming inflation continues to be at the same low rates as last 21 years (about 1,4% CAGR measured as CPI (KPI) by SCB in Sweden). If the return I generate is less than that, I believe I should just hand over my money to the cheapest index fund there is and spend my time on something else.

The reason for this is that absolute return on my capital is of much higher importance than beating an index. I will not be able to retire by beating an index. I will be able to retire because the businesses I own on average will increase my equity base by at least 7% p.a. I believe this way of thinking is more    close to how an owner of a business thinks, and I like my investments to be closer to that thinking than to beating some index that I anyway do not understand.

Now, 7% is not my target level. Currently it is rather 10% p.a. in nominal terms. So far, since end of 2000 which is as far back I can track my figures, I have had a CAGR return of some 12%+ in nominal terms. Now, as I still have a very large share of my financial assets invested in stocks, and I believe them to be somewhat overvalued currently, I would say that the 'true' intrinsic value CAGR is somewhere between 9-10%.

Given that I would be able to spend 100% of my time allocating capital, I would probably raise the target level to 12%. The figures may not seem very impressive, but having these levels over long periods of time is much harder than one thinks when you are young. Mistakes (losing all or a large part of your money) also takes a very large bite out of your total return.