Why is Past Performance Definitely Not Indicative of Future Results?
Updated: Feb 15, 2021
Recency bias is a tricky thing. We remember our experiences that have just occurred and when it comes to investing we think, “man, I should have seen that coming and invested that way”. Back in the late 90’s, I recall being told that nobody needed a financial advisor anymore because anyone could pick just about any tech stock and do fine. With the advent of online low cost trading, it seemed so simple. Unfortunately market share wasn’t the only thing that mattered and eventually companies really did need to make money. Stocks tumbled for three years and suddenly the “lost decade” was on for US equity investors.
Now we are in a world with NO cost trading, fractional shares, and roaring large cap stocks. If only Emmett Brown were around with his Delorean we could all go back and be rich! The problem with this is as companies grow, it can be difficult to replicate the returns that made them such popular stocks in the past. To understand why past performance is not indicate of future results, just look at the performance of companies prior to becoming a top ten stock.