re: Random Market Strategy

quote:

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Not. Past performance, good or bad, has been a horrible forecasting mechanism.
This is not a new idea at all. you can check the data in the blogs below:

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I disagree that past performance is a horrible forecasting mechanism, and I’m not sure what the 2nd link was arguing since it didn’t direct to an actual article, but the first article was referring to the performance of actively managed funds, not the performance of a company.

His argument which is widely accepted here, and one that Buffett has help popularize, is that trying to beat the broader market, especially trying to beat it by a lot like many active fund managers, usually results in losing to the broader market, and often by a lot.

And due to small sample sizes, the risky strategies, randomness, regression to the mean, and the survivorship bias of active funds, those who greatly outperform their peers one year, struggle to maintain the success in subsequent years because they just got really lucky. On the other hand, those that got really unlucky, often don’t make it to those subsequent years because that bad luck out them out of business. Those extreme winners and losers, are closer to gamblers than investors.

Now all of that is a lot different than saying the past performance of a company, is a horrible predictor of success, especially in the long run and when considering the performance relative to the underlying fundamentals and the market conditions that impact certain companies and sectors.

Well run companies like Berkshire, Apple, Amazon, Google, Disney, etc., who have had strong performances are far more likely to succeed than poorly run companies like Weatherford, GE since (maybe even before) Immelt, or sectors and sub-sectors of companies that have seen their better days (retailers like Macy’s, Sears, etc.).

Now if someone is just randomly picking the most extreme winners (weed stocks; crypto) over a short period of time without any regard for anything else and regardless of the rationality of that performance, then they’re likely to be in for a rude awakening. But again, there more gambling than investing, and not really a representation of a generally rational market with a much larger sample size within and between stocks.