Past Performance is no Guarantee of Future Results

Learning how to invest is one of those exercises where it seems that the more you read, the more questions arise when reviewing stocks to purchase. When looking at “Value Investing”, there are many theories or systems that people use to identify stocks to put money into. I came across the site Old School Value which keeps track of the performance of around 15 different value investing stock screeners and tracks the performance of the method over the past 16 years.

I’m both a semi- uninformed investor, as well as a lazy optimist, it would be great if I could rely on achieving the long-term returns calculated for a system like “Magic Formula Investing”. An average of 11% return would allow me to follow the relatively easy system of selecting a couple of pre-defined stocks per month, hold them for a year and sell them. I could turn an initial investment of $20,000 into an average cashflow of around $15,000 with no further investment after 20 years, with minimal effort and minimal capital risk.

Of the 15 different “value” stock screeners outlined by the site, there were 11 in total that were able to beat the S&P 500 over the 17 year test period outlined. The volatility on the investments was fairly significant, which is what I would expect for this type of marginally high risk investment, but some are much more significant with others, with the majority of the long-term gains coming from a year or two of 200-300% returns, and the rest of the years ending up at or below (or significantly below) what could be arrived at investing in a large-sized index fund.

This is what causes me to pause before hitting the “buy” button on almost everything. No matter how strong I feel my hypothesis is when going to purchase a security, I understand there’s a moderate level of risk that I’ll never see the money I’m investing again, or at least a chunk of it before I chicken out and sell the investment, no matter how “safe” it seems at the beginning (see the three year drop in the S & P 500 in the early 2000’s and 2008 as a seemingly “safe” investment).

I think that the main characteristic that I need to acquire to be a better investor is to have even a bit of long-term faith in the stock market (or any market). I am by nature a pessimist, which makes going long on stocks a significant challenge – betting that things are going to get better. I need to have faith that the pile of research I’ve done, the ratios I’ve reviewed, the news and opinions I’ve collected regarding the investment I’m making is at least kind of on the right path, and that at the time of purchase I had some sort of reason to by shares in a company.

I have to have faith that the long-term past performance will at some point be reflected in the future, and that’s what I’m working on now, as I’m slowly being enveloped by my investing “career”. Whether it’s an individual stock or something more basic like a bond ETF, I’m always going to wonder if there’s a better place I could have put my money, or there was a different (and possibly better way) of examining the potential investment.