Let us take the scenario of buying a mobile phone. One brand has been consistently good for the last ten years, while another has only recently entered the market. Which one are you leaning towards?
Most of us would pick the established brand. Its track record has earned that trust. But here’s the catch! Does a good past guarantee a good future? Not really.
There can be several instances where the newer models of well-established brands have fallen short of expectations and failed to match the performance of their predecessors.
A strong history builds confidence, but it shouldn’t be the only reason you buy something.
Cars work the same way for instance. A particular brand might have built a reputation over the years, and that’s exactly why it lands on your shortlist. But you still check the latest features, safety ratings, running costs, what else is available in the market and whether it fits what you need right now. Even something as simple as buying a pair of running shoes follows this pattern. We lean on what we already trust, then we still look around before paying.
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Why We Trust What Has Worked Before
Past performance got the brand onto your list. A closer look at the present, is what got you to buy it.
That’s the whole point.
Are we saying that past performance shouldn’t influence your decisions? Not at all. It is a valuable indicator.
Past performance shapes our decisions almost every day. It’s a useful signal. It tells you about consistency and how something has held up under different conditions. When you don’t have anything else to go on, it cuts down the uncertainty a bit. But it was never meant to replace a proper evaluation.
And this isn’t just about products we buy. The same logic applies well beyond shopping. It matters even more when it comes to investing, because these decisions have a direct bearing on your long-term wealth and financial well-being.
It’s natural to lean towards stocks or mutual funds that have delivered great returns lately. There’s nothing wrong with appreciating a good track record. But markets don’t stand still. Businesses change, industries shift, regulations get rewritten, investor sentiment changes, and global conditions never stay the same for long. A sector that looked unstoppable a few years ago can slow down, whether due to a shift in consumer behaviour, new competition, global pressures or simply changing policy.
So why does every investment document carry that one line, “past performance is not indicative of future results”? Simply because a company that created wealth over the last five years isn’t guaranteed to repeat that over the next five.
A sound investment decision never rests on a single number. It comes from asking better questions. Not just “how well has this performed,” but also things like:
- Why did it perform well in the first place?
- Are those same factors likely to continue?
- Has the company been able to consistently deliver on its promises?
- Does it still fit what I’m trying to achieve?
That’s not an exhaustive list, just a starting point. You could add more depending on the specific situation you’re evaluating.
Past performance can certainly inform a decision. It should never replace analysis, sound judgment, and thinking ahead.
This is the mindset we try to bring to your investment journey at ithought. We look beyond historical returns. Our research process goes beyond looking at historical performance. It is built around understanding the business, evaluating what lies ahead and managing risk. The aim is to generate sustainable, risk adjusted returns over the long term. If you’d like to know more about how we approach this, our team would be happy to walk you through it.
History teaches us a lot. But what comes next is shaped by what we do now, not by what has already happened.
