For a while I have tried to write something that points out that watching past performance isn’t going to predict the future in finances (and the stock market in specific). This weekend I had an epiphany about how the NCAA Men’s Tournament is exactly like stock picking. Bracketology and stock picking are so similar yet no one talks about March Madness in Finances ?
The the tournament you might see a #2 Seed fall in the first round of games or a #1 seed fall in the second round. For those not familiar with the tournament mechanics, before it starts all the teams that are participating in the tournament are split into groups of 16 and then ranked 1-16 in that grouping, based on their season performance. Every year a new school looks great, however, usually they don’t go far disappointing those who assumed they would win. This is an example of past performance meaning nothing in terms of future performance (in sports and in investing).
The same thing happens in the stock market in specific and investing in general . Simply because a stock or ETF has done well in the past is not the single best reason to buy more of that stock, or assume it will continue to go up. Past performance should almost be ignored, if you ask some real experts like Larry Swedroe. What a stock did in the past is an excellent index to see past performance. It has no bearing on the future value of the stock.
This one is really hard to latch onto as an investing concept, but trust me, I have been absolutely eviscerated (on the stock market) by following this exact idea (read my top 5 investing regrets for all the details).
Past Performance ⇒ Future Value ?
What predicts the future value of a stock? No one knows the answer to that question. Future value has nothing to do with past performance.
This is why I got into passive investing, predicting stock prices is a mug’s game (IMHO) I’d rather not play that game any more. All I need do is look at my prognostication skills at March Madness to remind me the dangers of stock picking.
Anyone care to disagree?
I knew there was no way for me to predict stock prices when the stocks I bought as dividend payers, meant to hold forever, stodgy old companies, grew 40-50% in value in 1.5 years, and the ones bought for growth tanked.
Good thing most of our money is in GICs and (through work) in buy-the-market funds. Well, and I guess also good that we mostly bought the stodgy dividend stocks not the growers!
PS One only has to look at the Leafs to realize past performance etc.