When it comes to investing, the past is definitely not prologue!
One of the least important and least informative questions that prospective investors (or anyone else for that matter) can ask of me — or anyone engaged in this profession — is what was your past performance (choose any period: last year, last three years, last ten years, ad infinitum). I have written and spoken on many occasions, as have many others, that past performance is, perhaps, the least reliable predictor of an investor’s future performance. This isn’t just an opinion, it is not only required by the SEC to be placed into just about every investment offering document, and is supported by a copious amount of independent academic research and evidence.
Not only the first time that I meet with an investor or teach a class, but on a constant, ongoing basis I reiterate that probably the least important person in the investment equation is me — or any advisor or coach for that matter. This isn’t false modesty on my part — as anyone who has known me for a while can tell you — I’m hardly a shy, retiring rose when it comes to ego. Nevertheless, what I try to stress to those who come within my coaching process is that at some uncertain point in time, I (or any supposed guru for that matter) might not wake up one morning or decide to retire (not likely anytime soon) or become non compis mentis. While there is a succession plan in place that would keep the processes in place and continue to service our clients, other investors still tend to place far more reliance then they should upon some supposed smart guru who they believe can pick the best stocks or, basically, foretell the future for them.
The key to a successful, long-term investment experience is the investment process and modality that is structured in place as well as the discipline (coaching) that maintains that process through not only the inevitable bad times that will occur in the future, but the good times as well (these tend to be even more dangerous for investors than the bad times).
What is ultimately most important is that the investment process itself survive the advisor or coach and continues in place, forward into the future. This is why I state that I am the least important part of the investment experience, whereas the process of investing that is utilized is the most important component.
There was an interesting piece on this in a recent “ThinkAdvisor” blog that is worth reviewing by all investors. It comments upon the excessive focus on “performance.” (Nick Saban, coach of the Alabama national champion football team is mentioned because he is quoted as stating that neither he nor his team focus on winning or losing, but rather just on the ongoing process that leads to success):
“…The reason Nick Saban, our best athletes, leading scientists, creative educators, and successful investors focus on process is because it anchors them in reality and helps them make sensible choices—especially in challenging times. Without that anchor any investor observing the investment world today would be intimidated by its complexity, uncomfortable with its volatility and (after the meltdown in 2008) visibly fearful of its fragility. Of course we all want good returns —but those who use a healthy process realize that performance is not a goal; performance is a result. This is such an obvious truth— but the investment world doesn’’t care about obvious, it cares about performance…
We cast our time and money far and wide in search of any possible edge. How ironic it is that the biggest edge is right in front of our noses and our unseeing eyes —free for the taking: “Past performance is no guarantee of future results.
Copyright (c) 2013 Frederick C. Taylor All Rights Reserved
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