One of the many pitfalls for the investor, and there are many, is the lure of past performance. Past performance is the rock that catches many a ship.
Even when the investor might know better, the false confidence that past performance provides can be ruinous. With all the information out there today, it never fails to amaze me how reckless investors can be by betting their savings on yesterday’s winners.
If you’ve ever been stuck in the fog, you know what I’m talking about. You think you’re in one place, and when it clears, you can’t believe where you are. What we imagine, or what we tell ourselves can be soothing, but it’s not always grounded. Overconfidence in one’s position happens all the time.
Investment firms offer so many products that one is bound to do well, and that’s the one that makes it on the cover of glossy literature like Time magazine’s “Person of the Year.” You know what I’m talking about. The annuities, the guarantees, the “look at what we did” commentary by salesmen.
Because most investors are sold what they own. Most often with past performance. Sure, it makes them feel better, but it also makes it easy to explain to a spouse. “Honey, it has a track record of X%.”
Understanding the emotions that come into your investing decisions is an area the late Charlie Munger knew all too well. Once, when he was buying a fishing lure, admiring the colors and reflections, he asked the owner if it was any good at catching fish. The owner said, “I don’t sell to fish.”
Action Line: Past performance is the investment lure that catches investors—not necessarily future returns. When you want to talk about building a plan, I’m here.
