Why past performance does not predict future results

  • October 15, 2015

Moore for your Money by Byron Moore


Question: Why do all the investment commercials say that past performance is no indication of future performance (or something like that)? That doesn’t make sense to me. Real life isn’t like that – in my business, you’re evaluated on results.

Answer: Imagine you’re a football coach. You’ve just called a play in which your quarterback is supposed to take the ball, pitch it out to the running back sweeping to the right and hopefully gain five or ten yards.

Byron MooreUnfortunately, at the snap of the ball, the quarterback fumbles. A lineman accidentally kicks the ball forward. Initially, no one sees the loose football. Then a tight end, who is supposed to be blocking a line backer, sees the ball, scoops it up and runs it in for a touchdown.

The crowd goes wild. Six points for the home team! Of course, that’s what you want the result to be on every play – a touchdown!

But when you go back into the locker room at halftime, are you going to say, “Way to goes boys! Great job! We’re going to run that play over and over again just like that in the second half!”

I hope not.

Because even though you got the result you wanted, you got it by accident, not by design. And accidents are very hard to replicate.

If you look at the product of the play (the what), you’re happy – you got a touchdown. But if you look at the process of the play (the how), you’re not so happy. You never ever want to fumble the football during a game. And when you do, just because it happens to work out in your favor, you don’t go back and fumble again on purpose.

You’d be surprised how many investments and money managers who produce good results over a short period of time do so as much by accident (i.e., fumble) as by design.

Perhaps they took a gamble on a certain stock or area of the market and it did well. But what if the gamble was imprudent – what if the stock or market sector had gone the other way? You never hear about that guy… because he got fired. But the lucky guy? He got a raise.

That’s why the question you should ask any investment management professional you employ is not, “How did you do last year?” Last year is never going to happen again.

And it has been shown over and over again that what a money manager did last year is not necessarily indicative of how she will do this year.

Don’t ask how they did (the product of their work).

Ask how they did it (the process of their work).

It’s a better indicator of how you’ll do over time in the future.