The Best Way To Judge Past Performance


On virtually every financial website on the planet there is a never-ending daily stream of stock tips and recommendations.  Consequently, the investing public is literally flooded with information and advice regarding what stock to buy today or not to buy.  Some of what is offered is supported by factual information and logic, but unfortunately, much of what is offered is merely based on the opinion of the author.  This presents quite a challenge to the prudent prospective investor seeking sound advice or guidance. The recommendations are presented and it is left up to the individual to act on the advice or not based on the content as written.

In addition to a barrage of information on what stocks to buy, there is also a proliferation of advice alleging to tell the investor what they ought to do.  There are pundits who strongly recommend virtually every type of investing philosophy or strategy available.  Some are adamant about investing in passive investments such as index mutual funds or ETFs.  Others recommend constructing portfolios based on the careful selection of individual stocks. These are just a few of the many “ought to’s” that are often vigorously offered as the one and only choice. 

Additionally, there are many pundits attempting to tell the investor that they should be investing in growth stocks, value stocks, dividend growth stocks, large caps, small or mid-caps, and the list goes on. This never-ending litany of information often creates confusion and anxiety as a result of information overload. Therefore, instead of answers, many investors are left with many unanswered questions such as whom to believe, what to believe, or where’s the best place to put their money?

To make matters worse, there is very little or virtually no accountability as to how the recommendations or tips have worked out over the long or short run.  To be fair, this last fact is somewhat understandable. As a rather prolific author myself, I understand the challenges that come with the public dissemination of advice and guidance.  This is not the same as specifically managing your own portfolio or the actual specific portfolio of someone else.

Financial writers are instead generally speaking to a broad and diverse audience.  In my own personal work, I have often presented research candidates that were specifically oriented to different investor types. Some of my past work has presented aggressive growth stocks; some have been oriented towards blue-chip dividend paying stocks and everything in between. To be clear, as it is with most financial writers, each new piece of work is often independent of other pieces of work that were offered previously. In other words, there is rarely any synergy between articles written today versus ones that will be written in the future or the past. 

Additionally, in my own personal case, I never offer specific or absolute buy or sell recommendations. Instead, I prefer to present what I believe are interesting research candidates that might serve a certain type of investor’s needs, goals or objectives. However, since I do not know each specific individual’s situation that might be reading my work, I always recommend that each reader conduct their own comprehensive research and due diligence.

Nevertheless, this doesn’t mean that there should be no accountability of an author’s work over time, whether it is mine or any other author’s. This last statement was the inspiration for this series of articles.

My Record as a Financial Writer/Blogger

In part 1 of this two-part series found here I presented what I consider to be a comprehensive report on the performance of individual research candidates presented in articles I wrote during my first six months as a financial author.  In this, part 2, I will complete a review of my first complete year (twelve consecutive months) of presenting research candidates on individual stock selections.

Furthermore, I believe that successful investing implies taking a long-term view when investing in common stocks. By long term, I am referring to investing in and owning a business for a minimum of a normal business cycle of 3-5 years, but preferably longer. Therefore, this series of articles is only reviewing the past performance of my work based on long-term results that spanned at least a normal business cycle. To repeat what I said in part 1, as Ben Graham so eloquently put it, "in the short run the market is a voting machine, but in the long run it's a weighing machine."

The Many Faces of Performance Reporting

Before I go on and present the record of the articles I wrote my first year as an author, I believe a few comments regarding performance reporting in general are in order. There are those that believe that performance reporting is a straightforward process, in truth it is not. Calculating the numbers from point A to point B for a stock, mutual fund, ETF, individual money manager or any other asset class does not necessarily tell the whole story.  There are many other considerations that should be taken into account when evaluating the performance of any investment.

Perhaps the most important consideration is the amount of risk taken to achieve a certain performance. There are times when taking on great risk produces great results, and of course, there are times when taking on great risk produces abysmal results. Therefore, when examining past performance, the prudent investor also evaluates the amount of risk it took to achieve it.

And since we all know that “past performance is not necessarily indicative of future results” it logically follows that knowing the amount of risk it took to generate a level of past performance is critical.  In other words, some investments are suitable for certain investors and others are not, regardless of past performance. Consequently, making an investment decision solely based on past performance can be both misleading and dangerous.

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