Jason Zweig often provides inspiration for a blog post, and his article in this past weekend's WSJ ("Are You Brilliant, or Lucky?") has done just that. The subject of luck versus skill has been one that academics, as well as practitioners, have wrestled with for decades, but this is not the time to try to address this in any detail.
What actually grabbed me was his opening statement: "Have investors finally learned that past performance doesn't guarantee future results?"
The answer, sadly, is NO!
We're approaching that time of year (January) when several magazines (e.g., Money) will identify the "top money managers of 2012." And how will many investors react? They will flock to whoever holds the #1 spot.
My response: sorry, but you're a year late.
Often the #1 fund managers have a minimal amount under management, and perhaps are concentrated in a few stocks that simply performed in an OUTSTANDING fashion. But investors don't care...they'll be sending their money their way once the manager's been id'd.
Investing is clearly not the only industry that falls victim to this. We see it in sports all the time, do we not? Professional athletes often receive very lucrative signing or resigning contracts, because the GM (General Manager), manager/head coach, and/or owner(s) expect past performance to predict future results.
Of course, this begs the question, if past performance ISN'T an indication of future results, should it be banned from being reported?
The answer: no. Because, it still tell us how the manager did in the past, and this information can have value. To have no such track record would, I suspect, be MUCH worse.
Imagine, for example, me, David Spaulding, putting up a shingle on January 1 offering my investment management service with absolutely no track record, because past performance is no predictor of future results. I suspect that folks would want some indication as to my prior success, in spite of my inability to say that what I had done could be done again.
In whatever endeavor we choose, we cannot guarantee that our past accomplishments will be matched in the future. Fortunately, this some times works where the individual had previously failed multiple times but then succeeds (Abraham Lincoln comes to mind). Knowing about one's past should always be part of the evaluation.