Is Past Performance a Predictor of Future Performance?
December 23rd 2007 10:49
Mr WWII fighter pilot, later a commercial airline pilot, landed in Germany, found a managed fund which in the previous year made a gain of 70 per cent and invested all his life savings with it. That year the fund had a loss.
One might ask the question: is past performance a predictor of future performance? The answer I found for myself is that it depends on what you are considering.
There are two types of business organizations you could be looking at: (a) managed funds, mostly financial business and (b) physical trading companies.
Managed funds invest in trading companies mostly, and their performance depends on many variables such as the performance of the physical assets selected, the boom/bust cycle, talent of management, etc.
Warren Buffett’s Berkshire Hathaway, an investment conglomerate, has produced for many decades a compound return of 33 per cent per year. Because of this track record and Mr Buffett’s known talent, I would say you could predict next year’s Berkshire’s return.
In the area of trading companies things could be made more or less difficult. You would not reasonably try to guess the future performance of a business just starting, I suppose, but you could be looking at a settled business with more confidence.
Consider Woolworths: it has a huge physical size and market share; it has a proven formula which it just has to keep using tomorrow; it has an unbelievable track record of earnings grow and, lastly, it could consider expanding overseas. Taking all this into account, how hard would it be to predict Woolworths next EPS?
So, I would say that the answer to the question above depends on the identification of a track record where you can spot reassuring trends, even though you would also need to consider the fundamentals, generally.
Would this be enough advice for our fighter pilot the next time he invests in a fund?
One might ask the question: is past performance a predictor of future performance? The answer I found for myself is that it depends on what you are considering.
There are two types of business organizations you could be looking at: (a) managed funds, mostly financial business and (b) physical trading companies.
Managed funds invest in trading companies mostly, and their performance depends on many variables such as the performance of the physical assets selected, the boom/bust cycle, talent of management, etc.
Warren Buffett’s Berkshire Hathaway, an investment conglomerate, has produced for many decades a compound return of 33 per cent per year. Because of this track record and Mr Buffett’s known talent, I would say you could predict next year’s Berkshire’s return.
In the area of trading companies things could be made more or less difficult. You would not reasonably try to guess the future performance of a business just starting, I suppose, but you could be looking at a settled business with more confidence.
Consider Woolworths: it has a huge physical size and market share; it has a proven formula which it just has to keep using tomorrow; it has an unbelievable track record of earnings grow and, lastly, it could consider expanding overseas. Taking all this into account, how hard would it be to predict Woolworths next EPS?
So, I would say that the answer to the question above depends on the identification of a track record where you can spot reassuring trends, even though you would also need to consider the fundamentals, generally.
Would this be enough advice for our fighter pilot the next time he invests in a fund?
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