False Sense Of Security: Past Performance Doesn’t Guarantee Future Returns

By Greg Tolpigin | More Articles by Greg Tolpigin

It seems in the current age of poor banking performance that funds are being directed into other companies and sectors with those staging the best performance over the past 12-24 months experiencing the best buying interest. However, we have always been told that past performance is not a guarantee of future returns when assessing fund managers and the same I believe is applicable to share price performance. It definitely can provide a false sense of security.

It always amazes me that fund managers say they are bottom-up fundamentally focused, but then seem to chase share price performance and end up making the most dreadful decisions. Decisions that a simple back of the envelope analysis would have easily shown as overvalued and even a standout short sell. Getswift (GSW) is a classic example of fund managers chasing share price performance without doing any homework. And I literally mean no homework because it was one of my favourite shorts following just a 10 minute back of the envelope analysis and a Google search on the company.

This leads me to warn investors today that exceptional share price performance is not a reflection that the market has completed the relative due diligence on the company. Nor is it if you see Australia’s largest fund managers on the share register. I express this warning today as we are beginning to see more market darlings and companies that have enjoyed solid appreciations begin to trip up and issue earnings guidance or news that is inconsistent with their market valuations.

The unfortunate aspect behind this is that shareholders (including professionals) seem to be ‘lazy’ and while the share price is performing well are happy to give management and the fundamentals the benefit of the doubt. Then of course when share prices begin to turn south, they tend to then buy on dips still adamant that nothing has changed and the share price will soon revert back to its upward march. The worst thing that can happen is if this strategy works a few times, because when the real reversal occurs it takes an age to actually admit one is wrong and actually sell.

Perfect examples of this can be found in recent years with the telecom sector. A once top of the list market darlings are now looked upon like the plague. And this brings me to some of the recent stumbles in the past few weeks. A2 Milk and Bellamy’s which are down 25% and 30% respectively over the past month. Treasury Wine Estate is down 20% from its peak earlier this month after doubling the past year. It’s dangerous buying these stocks on these high valuations and extreme earnings multiples when the slightest disappointment has such an adverse price reaction. That is the result of being priced to perfection.



In many of these cases it can be a slow grind higher which over time produces an attractive return, but all unravels in a matter of days. There is also the added risk of jumping onto such trends late in a cycle – time risk. For example, to enjoy a gain of 10% may take 2-3 months of holding, but any profit warning or other issue can produce a 20% drop in 2 -3 days. So much time risk in holding a company while being exposed to a potential downgrade, that can have a severely skewed impact.

By this I mean, if the company were to produce an earnings upgrade, the likelihood would be a muted price gain, while a downgrade sees a huge drop – a case of the good news already priced in. Bluescope Steel is a classic example of this, following an earnings upgrade last week. The share price spiked from $18 (the day before) to $18.80 and by the end of the day was trading lower than before the upgrade and is still doing so today. Imagine if it was a downgrade? I can guarantee the reaction would not have been so muted if it was downgrade.

I send this message out to readers urging them to be cautious when looking where to park their money when switching away from the traditional banks and property sectors (that I have been bearish on for the past 18 months). While I have been an economist and chartist, I do know that your trend is your friend but only when you enter the trend early. A late trend is very, very dangerous.

Greg Tolpigin

About Greg Tolpigin

Greg Tolpigin has over 20 years of experience as a proprietary trader and high-level strategist for the major investment banks including Citigroup, Bankers Trust and Macquarie Bank.

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