It is printed in every prospectus. It appears in annual reports. And it has become a standard denotation for due diligence decks. Yet it has the potential to be among the most misleading statements you will ever read: past performance is no guarantee of future results.
Okay, sure, it is technically true. But if you really want to protect investors from bad assumptions about forecasted returns, we would propose splitting this into two separate statements – each of which might be more useful than the one we’re all accustomed to reading.
There are NO guarantees of future results. The best case in any consumer sector is that you’ll be out a lot of time and energy in an effort to recapture your money from the company that made the guarantee, and finance is worse than most consumer sectors. Remember that just a few years ago, millions of managers and advisors being paid billions of dollars lost hundreds of billions of dollars, and for the most part not a single thing about those arrangements has changed.
Past performance is the best indicator of future results. Just because there are no guarantees doesn’t mean future results are random. They aren’t. From hedge fund managers to self-directed investors, past performance when viewed properly offers valuable indicators. What we see is obviously something in-between: not a perfect guarantee but not random, either. The bottom past performers skew toward the bottom in the future, and the top past performers skew toward the top.
We examined the performance of a group of 20,000 self-directed equity traders in detail. If you were inclined to see the markets as random, you might have observed that someone in the best group of traders has an 80% chance of failing to be in that group next time. That would be true, but it would miss the point. We would observe instead that the a top past performer is likely to be above average, a bottom past performer is likely to be below average, and when viewed as groups, top past performers are very likely to beat bottom past performers.
Of course, it isn’t just any measures of past and future performance we’re talking about. You have to know what you’re looking for, how to sift other things out efficiently and how to shape the insights you’ve mined. (This is a big part of what Array helps partners do.) But the material is there to build something valuable. There are no guarantees of future results. But based on Array’s very recent “past performance,” we think we see some pretty interesting indicators of a bright future for self-directed investors.