Chasing Performance: Yesterday's Winners

"Past performance is not indicative of future results." Everyone knows this. Few act on it.

The Performance Chasing Cycle

1. Stock/fund performs well — Gets attention
2. Media coverage increases — "Best performer!"
3. Investors pile in — FOMO kicks in
4. Prices rise further — Seems to confirm the thesis
5. Performance reverts — Returns to average (or worse)
6. Chasers lose money — Bought high, now holding losses
7. Repeat with next hot thing

Why Performance Chasing Fails

1. Mean Reversion

Extreme performance tends to revert to average:

• Hot stocks cool off
• Cold stocks warm up
• Outperformance attracts competition

2. Buying High

By definition, you're buying after prices rose:

• Less upside remaining
• More downside risk
• Valuation stretched

3. Crowded Trade

When everyone buys the same thing:

• Prices overshoot
• Selling pressure builds
• Corrections are sharp

4. Survivorship Bias

You only see the winners:

• Losers disappear from view
• Success seems more common than it is
• You're seeing a biased sample

The Data on Performance Chasing

Mutual Fund Study

• Top-performing funds in Year 1
• Followed for next 5 years
• Result: Most underperformed average

Stock Study

• Stocks up 100%+ in one year
• Followed for next 3 years
• Result: Average returns were below market

Investor Behavior

• Money flows INTO funds after good performance
• Money flows OUT after bad performance
• Result: Average investor underperforms the funds they own

Signs You're Chasing Performance

Behavioral Signs

• Buying because "it's been going up"
• Attracted to stocks in the news
• FOMO driving decisions
• Checking "top performers" lists

Portfolio Signs

• Recent purchases are all recent winners
• Selling laggards to buy leaders
• High turnover chasing returns
• Concentrated in hot sectors

Thought Patterns

• "It's going to keep going up"
• "I'm missing out"
• "Everyone is making money except me"
• "This time is different"

How to Avoid Performance Chasing

1. Focus on Fundamentals

• Use ShareValue.ai scores
• Ignore recent price performance
• Ask: Is this a good business at a fair price?

2. Be Contrarian

• Look where others aren't
• Consider out-of-favor sectors
• Buy when others are fearful

3. Have a Process

• Define criteria before searching
• Stick to your strategy
• Don't change based on recent results

4. Check Valuation

• High recent returns often mean high valuations
• Ask: Am I paying too much?
• Remember: Valuation matters

When Recent Performance Matters

It Might Be Relevant When:

• Performance reflects improving fundamentals
• Company is executing on a turnaround
• Industry tailwinds are sustainable
• Valuation is still reasonable

It's Probably Irrelevant When:

• Performance is purely sentiment-driven
• Valuation has become stretched
• Everyone is talking about it
• You can't explain why it will continue

The Right Questions to Ask

Instead of "What's been going up?", ask:

1. What's undervalued? — Look at Valuation Scores
2. What's high quality? — Look at Quality Scores
3. What's improving? — Look at trend changes
4. What's being ignored? — Look beyond headlines

Congratulations! You've completed the entire Learn curriculum!

You now have a solid foundation in:

• Why and how to invest in stocks
• Understanding ShareValue.ai scores
• Practical investing skills
• Common mistakes to avoid

Your next step: Put this knowledge into practice. Start using ShareValue.ai to find opportunities, build a watchlist, and make informed investment decisions.

Good luck on your investing journey!