Does the past performance of a stock fund manager really matter? Should you invest in a hot fund?
Not according to Standard & Poor’s Persistence Scoreboard: “Only 9.72% of large-cap funds, 6% of mid-cap funds and 3.27% of small-cap funds maintained a top-half ranking over five consecutive 12-month periods.” (The Wall Street Journal, March 3, 2012, p. B4, “Bucks”)
In other words, active managed funds had a difficult time just achieving AVERAGE results on a consistent basis and fewer than 10% of them managed to reliably achieve above-average results.
Why? If superior results were the product of skill, then past good results should be a good predictor of future good results.
But, if stock picking outcomes are truly random, then superior results are either a predictor of nothing, or a predictor of inferior future results as the inevitable reversion to the mean occurs. Given that hot funds tend to be overpriced and trade frequently with high transaction costs then, most likely, superior results in a random walk environment are a negative indicator.
Closing quotes:
“Most people get interested in stocks when everyone else is. The time to get interested is when no one else is. You can’t buy what is popular and do well.” — Warren Buffett; 1930-
“A market is the combined behavior of thousands of people responding to information, misinformation, and whim.” — Kenneth Chang
“If past history was all there was to the game, the richest people would be librarians.” — Warren Buffett
“There is nothing so disastrous as a rational approach to an irrational situation.” — Proverb
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