Past Performance is not a predictor of future results…but sure helps filter bullshit

“Past performance is not necessarily a guide to future performance.”

Though the disclaimer has become so oft-repeated footnote in financial disclosures that it has become ignored by the very people who should pay close attention to its hidden meaning.  Its shield is the hidden wall that any new investor is bound to hit as they spend money on investment advice, hand-holding, and account management fees.  As I open dozens of reports and disclosures weekly, I can’t bit smirk at the warning above.

I was chatting with an old friend the other night as he went through his 401(k) asset-allocation.  He was simply seeking help on the pie-chart of equities vs. bonds, domestic vs. international, and fund selections.  As we looked past the marketing names and details, the discussion quickly shifted to fees, when I noticed a sales load on some of the funds doing something has trivial as attempting to track the market (a S&P 500 index fund!).  He seemed to be trading the company match just to pay the ‘entry’ fee to the fund!  What utter nonsense, unless I thought, the manager was beating the index consistently.  No surprise, however, when I saw that the returns were abysmal despite the asset purchase and asset management fee due to the advisor ‘actively’ managing the fund by timing certain purchases/sales.

Since an investor is expected to pay for active management of their funds and asset management fees are often withdrawn at the beginning of the period, shouldn’t the investor expect a certain level of return.  After all, the father of modern investing, Ben Graham wrote of what defines an investment in “The Intelligent Investor” –

“An investment operation is one which, upon thorough analysis, promises safety of principal and an adequate return. Operations not meeting these requirements are speculative.”

When we go to a doctor, we have a reasonable expectation of becoming healthy in the near future.  When we hire a lawn mowing service, we expect the grass will be cut.  When we hire software developers, we expect the product to be developed to our needs.  So, why is it, that when an investment advisor allocates our assets into the market, their own asset is not on the line?  Why is it that, when the market has returned historical data for almost a century and we have predictable market movement, advisors who claim superior strategy, research, active management and tactics, have no responsibility when they don’t deliver?

I’m calling bullshit on the cop-out served by ‘past performance is not a predictor of future results”

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