Why Past Performance Isn’t Indicative of Future Results In The Markets and In Life And What To Do…
The greatest and most frustrating thing about investing is that no matter how stellar your past track record and financial performance may have been yesterday, it is irrelevant today.
Taming your ego, eliminating emotions from decisions, not believing you are smarter than the market, the art of letting go, and resisting the urge to not fight the Fed are in your best interest.
Who knows what will happen tomorrow? Yesterday is irrelevant. Don’t hold onto it since what’s certain is uncertainty.
Volatility, rising interest rates around the corner, Russia’s imminent invasion of Ukraine, possible tax hikes, hyperinflation, panic selling, and fear all around, doesn’t mean you trim, dump all your stocks, wash trade or scalp them to take advantage of price movements. You stay in it for the long run since passive traders historically beat out active traders for this reason.
The markets over time go up so so should you. An overnight success takes roughly 10 years. Don’t be in it to beat the market. Be in it to earn recurring income and build multiple income streams that fund your lifestyle in an appropriate fashion for real security and longevity later on.
Today, it’s hard to get by on only sustaining yourself on your portfolio-investment income, let alone a job. That’s why having 5–10 passive income sources is ideal in case the S&P 500 is down ~8%.
“The markets can remain irrational longer than you can remain solvent” is another powerful realization every investor should take into consideration before they go all in or all out to panic sell. So be cautious and flexible as market conditions evolve.
Typically when companies engage in financial engineering through stock splits or reverse stock splits, either by increasing or decreasing the number of shares outstanding while decreasing/increasing share price, over time, it doesn’t fuel or make the company more valuable.
A stock split simply addds more liquidity and narrows the bid-ask spread for more price opportunities. Stock splits are taken advantage of the most by retail traders who hope the stock will zoom to sell and cash out. If stock splits and financial engineering helped every company that has engaged with them boom in value, every company would do so but since it doesn’t work, the most notable and reputable established companies rarely engage unless they see their stock price at unrealistic expensive levels.
Just like quarterly earnings reports can bruise a company short-term, stock splits help temporarily pump up the stock making it more available to investors. When companies engage in stock splits, it tends to lead to disappointing earnings reports since they aren’t trading at fundamentals anymore, another concern for not immediately jumping in on an opportunity just because the share price is less expensive than before. If it looks too good to be true, it usually is.
History Repeat Itself (Kinda)
There are certain paradigms we can learn from the past that tend to repeat in various ways and bite us in the back every time. Every so 8–10 years, a recession occurs and the same process tends to repeat. The Fed acts as a “discount window” where banks can borrow short-term funds from the FED as a reliable backup.
The FED is known as the lender of the last resort since it can supply and print unlimited amounts of money to the banking system and government to cover any short-term collapse. This overreliance and lenience in the government have saved the financial industry throughout history due to their risky arbitrage and faulty bets in the past, most notably during the Housing Crisis.
The Too Big Too Fail banks have become reliant on systems just like this youngest generation have become reliant on a bull market, never witnessing a bear market in their lives until today, dumbfounded and skeptical that 2022 is real. This leads them to conflate brains with a bull market, assuming that asset classes and stocks only go to the moon and trade at 15–30x their adjusted earnings multiple is a normal sign of growth.
Similar to our own lives, as we grow up, we become dependent on certain things, people, and lifestyles, training ourselves to have a harder time becoming comfortable with the uncomfortable. Our resilience and strength muscle weakens in face of adversity, especially this generation that clings onto social media and self-help to woe their troubles away.
Alongside these habits and lifestyle choices, we also cling onto people and their assumptions. We must remember people’s expectations of you don’t have to become your reality. People expect more from others than they do from themselves. As humans, we are social creatures and want others’ approval and recognition yet we’ve gone too far. Especially in the classroom, we are trained to believe there is only one way, one rule to do things in school based on a grading system, whereas in life, the right way is our way.
Transitioning to becoming a student of life from a student of the classroom is a challenge. It was for me until I discovered the vast world of startups, experimentation, and the power of failure. It is indeed the best teacher and life lesson. Rejection is redirection for a reason.
Although it’s easy to get jealous of those with innate talent and skill, their journey isn’t as sweet or worthwhile as those who learn it on their own one step at a time. The ultimate goal in life should be to uncover what you are capable of. You won’t savor the journey nearly as much if you already know what you have.
This is a trap investors easy get into as they rely on the recovery stage past the trough or the luckiest moments in their life as a guide. Loss aversion plays a big effect and hurts people’s way of thinking as well when they become surprised it isn’t that way most of the time.
One of the best ways to conquer and let go of something to almost guarantee success and fulfillment is to lower your expectations and not base the present moment on prior results. Just because you were successful in this venture doesn’t mean you can raise millions in funding with the next one. It must be different for a reason! Or if you were a top A student, it doesn’t entail you will be able to navigate life smoothly. No wonder top students or the academically gifted don’t tend to be the ones running the world. Not all but on average according to countless research.
Stay realistic, prudent, and take one day at a time. Expect uncertainty because what’s certain is uncertainty and if you find yourself getting too reliant or cocky on past results, bury them so you can focus on what’s at hand. It’s a journey not a race.
Lastly, don’t strive to time the markets or believe you know anything. The more we know the more we realize how much we don’t know. The past is the past and cannot be changed. Hopefully, you learn and apply what you’ve learned from it but don’t lean on it like it’s your only outlet.
Thankfully the markets are a leading indicator. If we want to predict the future, we must create it by starting now, not later.