Have you ever watched a selective attention test video?
The instructions: watch this 30-second video of this group of six people standing in a small space and count how many times the people wearing white shirts pass the basketball.
The video begins, the people are moving in different and random directions ˗ you are intensely focused on how many times the ball is passed between the people in white. The video ends and you proudly proclaim, “15, the ball was passed 15 times.” You are correct. The ball was passed 15 times, but did you notice the gorilla?
“What gorilla?” When the video is replayed and you are now focused on finding a gorilla, there he is. A man in a bad gorilla suit leisurely strolls into the scene, stops in the middle of the group, faces the camera, gives the prototypical gorilla fist pounding chest gesture, and then walks off the screen to the left. Gorilla guy is in the scene for almost half the time.
The original architects of this test and authors of The Invisible Gorilla, Christopher Chabris and Daniel Simons, examine how “…our minds don’t work the way we think they do. We think we see ourselves and the world as they really are, but we’re actually missing a whole lot[1].”
Past performance is no indication of future results (or some derivation) is printed on every piece of investment literature, but the recent past performance is front and center and the object of our intense focus – like basketball passes. What happened today (past)? What happened this week (past)? How did we do this month (past)? How are we doing year to date (past)?
There is an overwhelmingly powerful feeling that something doing well will continue to do so and something performing poorly will continue to do poorly.
The evidence suggests an investment or asset class that did well last month, last year, the last three years, or even the last five has no connection to how it is going to do tomorrow, next year, or the next five years.
The Evidence: The following piece of research highlights the perils of this thought process better than anything else I have seen. The Standard & Poor’s Persistence Scorecard details how investments, mutual funds in this case, do after a period of relative outperformance.
As we can see in the table, there were 527 domestic (U.S.) mutual funds that ranked in the top 25% performers for the five-year period ending December 2018. One year later less than half (48.58%) of those 527 remained in the top quartile, only 33.21% after two years (December 2020), and 0.00% survived through four years (December 2022).
While we don’t know what will happen in the short term, we do know that recent historical performance has no bearing on future results – past performance is no guarantee of future results.
A friend and colleague of mine recently remarked about his most successful client. He was not referring to someone who had the largest balances, the highest net worth, or the most successful business, rather he was simply referencing a single client who has remained calm and focused on the long-term for decades.
“She is an 85-year-old lady who does not own a computer, refuses to watch the news, and shreds her investment statements without opening them.”
I am not suggesting you shred your statements, but I am suggesting an ability to ignore the short-term fluctuations and historical performance in favor of a longer-term perspective is one of the most powerful contributors to successful outcomes.
As always please give me a call if you would like to discuss this or anything else on your mind.
My Best,
Ryan
[1] The Invisible Gorilla. Sourced from - http://www.theinvisiblegorilla.com/gorilla_experiment.html
[2] https://www.spglobal.com/spdji/en/documents/spiva/persistence-scorecard-year-end-2022.pdf