We see the disclaimer way too often. “Past performance is no guarantee of future results.” It is massively over-used—plastered on countless investment reports, statements and research. It’s not simply meaningless; it’s as if it’s not even there. And that creates a huge problem, because the message itself is really true: Past performance has no predictive value.
Since we are looking for something that does have predictive value—all the research, experience and hard facts say: Look elsewhere.
This is not a controversial finding. There are no fringe groups of investors or scholars penning op-ed pieces in the Wall Street Journal shooting holes in the logic of this reality. Each year there is more data, and each year that data reconfirms that past performance is completely unreliable as an investment tool. Given all that, you would think it would be next to impossible to find any serious investors still using past performance as a guideline. Indeed, that would be a logical conclusion.
But logical conclusions are often wrong when it comes to understanding human behavior. Not only does past performance remain an important issue in the minds of investors, for the vast majority it is the primary issue. In a study I referred to in my August column, 80% of the hiring decisions of large and sophisticated institutional pension plans were the direct result of outstanding past performance, especially recent performance.
The reason investors and the investment industry rely on performance is because it’s simple, objective and easy to measure. But more importantly, performance goals, performance reviews and performance measurement are so common in business, in sports, in education, in investing—almost everywhere—that not using them feels uncomfortable.
The alternative, evaluating and observing the managers and their process, is far more subjective and the results are not nearly as straightforward. But process is a much better predictive tool in the search for future success—and the most successful people in their fields focus on it and only it.
For anyone who follows college football, Nick Saban is the man. His teams have won four of the last 10 BCS championships, and he boasts a lifetime record of 154-55-1. His extraordinary success has generated huge interest in his coaching style. In a recent Forbes interview Saban emphasized that he teaches his players not to think about winning or losing, but rather to focus only on the processes that will lead to success.
Not About Results
Studies of Olympic athletes show that, with rare exception, physical ability alone is not enough to differentiate between medal contenders. The difference between winning and losing is much more a function of mental focus and technique—which are finely honed during years and years of practice. When asked what they focused on during competition, all of the medalists said their attention was on executing their process, not on the end result.
In business, focusing on the end result (performance goals) may show results over the short term, but in the long run is actually damaging and counterproductive. A recent article in the Harvard Business Review is titled “Consider Not Setting Goals in 2013.” The point of the article and others like it is that too much focus on performance goals is not a healthy business practice. But performance goals are easy to set, easy to measure, easy to reward— and hard to give up.