Where you are trying to go — Investment Planning: Investor's CalcStation | How you are going to get there — Portfolio Management: Investor's WorkStation | How well you have done — Modified Dietz Performance Calculator: PerfCalc | What you need to think about, know, do, have, use, forget, and avoid — Investing Principles and Perspectives: In My Opinion | Home | Contact Us | Free 30-Day Software Trials | Prices/Order

"Past performance is no guarantee of future results" is a required and responsible investment footnote. 

However, it is intriguing, if not amusing, that most investment analysis starts with the "Past Performance" epitaph and then investment recommendations are made using past performance as the primary basis for investment selection, portfolio management, and projected results and, as a subliminal suggestion, that the investment past just might have some actual connection to the investment future:

For example, Modern Portfolio theorists, using the likes of Monte Carlo analysis to validate the use of past performance investment analyses and to provide ill-advised investment performance projections to comfort investors, would have investors rely on an investment non sequitur:

• A Monte Carlo analysis program indicates that there is a 75% probability of future investment success because, and only because, there actually was a 100% certainty of a 75% probability of investment success in the past if the advisor/investor had had the ability to select those same investments in the past with the same mix of investments for the same amount of time.  

• If investment history repeats itself exactly as the assumptions installed in a Monte Carlo analysis program, one can reasonably conclude that there is a 75% probability of having the same investment success in the future. 

• Therefore, in this case, "Past investment performance is a 75% guarantee of future investment success." 

• Therefore, the investor warning ,"Past performance is not a guarantee of future success," is invalid to the degree of the probability of investment success predicted in the analysis.

• Therefore, some "Past performance is a guarantee of future success" to some extent.

• What the heck, let's go one step further, "Past performance is a guarantee of future results."

Past performance is not only not a guarantee of future results, it has little to do with it.

• The Weatherman does not say it will rain today, Wednesday, because it did last Wednesday. 

• It will rain on Wednesday or any other day of the week if the conditions for rain exist, not because of the day of the week.

• The Weatherman sees certain conditions today or the probability for rain causing conditions in the future. 

• Reference to last Wednesday’s rain will be made only in passing such as that last Wednesday the conditions were similar and it rained.

There is a major distinction to be made between the conditions that cause rain or any other phenomenon of nature and the conditions that cause certain results in the financial markets.

The conditions for rain are virtually finite but the conditions for price appreciation, as an example, are, most certainly, infinite.

Past performance investment analysis is used to project current and future investment performance without giving enough consideration to the underlying conditions that appear to have caused past investment performance.

The same or a whole new set of investment performance variables may be present in the current market conditions to cause the same or vastly different investment results from past investment performance and the associated market conditions.

There is no connection, whatsoever, other than coincidental, between the past performance and the future performance of the financial markets and the individual companies that make up the financial markets:

• The past is a potential path but not an absolute or necessarily even a probable connection to the future.

• At best, past performance represents a possible trend or tendency and should be an investment afterthought prior to investment action but very seldom the reason. 

• This type of investment analysis may take you in the right direction, but, only by chance.

A Company may report outstanding earnings, sales, growth rates, and even new products and one would still have to look in the newspaper to find out the impact on the price of the company’s stock.

Mark Finn of Vantage Consulting has spent years analyzing trading systems. He's a consultant to large pension funds and Fortune 500 companies. He's one of the more astute analysts of trading systems, managers and funds that I know. He has put more start-up managers into business than perhaps anyone in the fund management world. He has a gift for finding new talent and deciding if their "ideas" have investment merit:

Why is past performance used so often? 

It is a simple question to ask and an even simpler question to answer: 

• Past performance investment analysis does not require investment insight, vision, or understanding.

• Investors are curious about it and comforted buy it.

• Investors and advisor are captivated and mesmerized by the beautiful and bountiful action reports that can be created by this type of investment analysis.

• Advisors need only look in their rear view investment mirrors to decide where to tell an investor to drive.

The law should state that past performance cannot be used as a basis for current and future investment recommendations:

• The investment warning, "Past performance is no guarantee of future results" should be further modified to read, "Past performance may not be referred to as a basis for selecting current or future investments because past performance has very little to do with current or future investment results."

The law should continue:

• Investment results will depend on having an investment philosophy as to how capital should be managed, by having a vision for the future, and by researching, analyzing, selecting, and investing in outstanding companies that hopefully will participate better than most other companies in the present and in the future.

Bottom line, If you are using past performance, you are using the wrong argument.