Why Investment Performance Is a Distraction

[Temperament]

Why Investment Performance Is a Distraction
Successful investing stems from process, not goals


i think i unknowingly practise this but i do look at pedigree of a company.
What say you? (What do you think)? How many of us are actually like that?
many or very little?

"If you don't or can't base your judgement of friends and kins on their past performance, what then?

[Clement]

I am not sure what you meant by that post. Everyone of us looks into a company's past performance when determining future performance. The past is still our most reliable guide to the future. The danger is that many simply extrapolate performance trends without any understanding to the drivers behind this performance. I used to be a short term trader and even in trading, even if it turned out to be a good idea in hindsight, it does not follow that it was a good idea at that time.

[Temperament]

http://paid.outbrain.com/network/redir?k...rc=3335201

Maybe after you read the full article, you will know what i mean. Or you may not agree with this article?

[Clement]

Okay, thanks for clarifying. I agree with the article. Using past performance in the investment fund selection process is a short cut method to attempting to identify future winners. It is convenient, simple and more importantly, easy to defend for financial advisors and bankers. Other forms of allocation require arguments that the client might not necessarily follow. Past performance can be useful for identifying losers though, as bad habits are easier to repeat than good ones.

[Dividend Warrior]

I agree that looking at recent past financial performance is one of the steps in doing our due diligence.

However, we should keep in mind that "Past performance is no guarantee of future returns".

[NTL]

If a fund is having a poor performance, will anyone go and take a look at the process?

If past performance is not important, why is it that in most introduction paragraph to successful investors, it is talking about they achieving XX% annual returns over a period of YY years?

[Clement]

Well, you have answered your own question. Past returns are not totally unimportant, they just have low predictive value on their own. The only objective way to measure effectiveness of investment processes is still the results. Being an successful investor is not always the same as running a successful investment management operation. You can have all the best processes but it's useless if you can't attract capital.

[corydorus]

I play with XIRR measure often. One thing to be careful is when fund first started, they can play with relative small size of funding. The performance can be manipulated by having more funds introduced for different markets, take higher risk on each of them or with low cost structure. When one of them do well, it is then widely marketed that the fund has been doing consistently well for many years with strong performance. And right after most retailers steps in, within a few years, the performance dropped.

[Clement]

I play with XIRR measure often. One thing to be careful is when fund first started, they can play with relative small size of funding. The performance can be manipulated by having more funds introduced for different markets, take higher risk on each of them or with low cost structure. When one of them do well, it is then widely marketed that the fund has been doing consistently well for many years with strong performance. And right after most retailers steps in, within a few years, the performance dropped.

Some strategies do well with small funds while others do well with larger funds. It all depends on the fund's investment intentions, ie passive stake or activist investment.

[corydorus]

I play with XIRR measure often. One thing to be careful is when fund first started, they can play with relative small size of funding. The performance can be manipulated by having more funds introduced for different markets, take higher risk on each of them or with low cost structure. When one of them do well, it is then widely marketed that the fund has been doing consistently well for many years with strong performance. And right after most retailers steps in, within a few years, the performance dropped.

Some strategies do well with small funds while others do well with larger funds. It all depends on the fund's investment intentions, ie passive stake or activist investment.

I understand this logic. My intention is to warn about possible manipulations by hands behind funds who play by numbers. Is like a flip of the coin. By throwing more coins, and when one of them do well consecutively, they are pushed out as champion. This will attract a lot of funding however such game cannot go on forever and soon performance shows up later again based on flip of the coin.