As long time proponents of market efficiency, we are still amused by the investment methods that keep getting regurgitated. They tend to fall under two main camps: The Charting methods, that analyze past performance and try to find trends, and the Fundamentals method, which analyzes various companies and determines which is undervalued. Of these two, the Charting method provides most amusement.
Anyone who has bought a stock or bond, or even glanced at a relevant brochure, has seen the small print: “Past performance is no indication of future earnings.”, or some paraphrase thereof. Yet people still think they can get ahead by ignoring precisely that point. This leads to back to back articles in Kiplinger on investment strategies, which read as follows:
Opening Shot – by James K. Glassman
Stocks, as I have said too many times to count, are meant to be long-term investments. So one challenge for investors is to figure out which companies will perform best over, say, the next ten years. But how? A good way to start is to look at past performance, so I asked the number crunchers at Morningstar to calculate which stocks gained the most over the past ten years.
And five pages later:
Don’t Bet on the Past – by Robert Frick
Investors can learn much from Wile E. Coyote. Hearing Road Runner’s signature meep meep each time the bird rounds a bend, Wile E., knife and fork in hand, coils and springs on the next meep — only to be flattened by a bus with a meep-sounding horn.
As you can guess, Frick is saying investors are Wile E. Coyote, and they are getting flattened by following past stock performance. His blurb says: “Investors became overly optimistic about past market winners and overly pessimistic about losers.”
Needless to say, we think Frick actually provides sounds stock market investment advice, and we think he should pay a visit to Glassman down the hall.
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