I just can’t get over the importance people place on past performance when they choose their investments. It’s everywhere. Look at a mutual fund, the first thing they show you is past performance. For your 401k fund at work, it might be the only thing they give you other than the fund’s name. I just read a Wall Street Journal article about the hanky-panky that some of the mutual funds have been pulling. In the article they talk about how the funds didn’t perform all that well. As if it was ok to cheat their clients if the funds had done ok.
I think the emphasis on performance is like the old joke (stop me if you’ve heard this one) about Fred, who is searching under a street lamp. Joe comes along and asks him “Lose something?”. Fred says “Yeah, I lost a dollar.” Joe asks “Did you lose it right here?” Fred says “No I think I lost it around the corner”. Joe asks “Well why are you looking here?”. Fred tells him “The light’s better”.
Performance is emphasized so much because it’s an easy number to look at (a better lit corner). But usually it’s not much use. If a particular methodology worked last year (let’s say choosing gold stocks) odds are it’s not going to do as well this year, it’s already had it’s run. The only time I think it’s really useful is in looking at the performance of a person over many years. Then it may be a indicator of their investment skills. But looking at one years’ numbers or the performance of an investment opportunity where the players keep changing, doesn’t mean much.