Performance Chasing At Its Worst

Performance chasing is defined as the frequent trading in and out of various funds, securities, and sectors in response to recent market performance.  Basically, performance chasers constantly buy what’s hot and sell what’s not. For instance, a performance chaser might buy last year’s best-performing fund and sell the worst-performing.

History has shown this to be a poor strategy, however, since the best performing funds and sectors rarely stay that way for long.  Thus, performance chasers tend to buy in near the top of the trend and sell near the bottom, dooming them to perpetually under perform and hitting them with painful tax consequences to boot.  In an admittedly out-dated study (1981-2001) the Hulbert Financial Digest calculated the returns you would have seen had you invested all your money every year in last year’s best-performing fund.  The results are dismal:  if you’d invested $10,000 in 1981 and followed this strategy, you would have a mere $2.32 left at the end of 2001.  No, that isn’t a typo.  You would have achieved what amounts to an average 31.4% loss per year.  Wise long-term investors do not chase performance.

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Meet Thomas H. Forester

There was but a single equity mutual fund with a positive return in 2008, the Forester Value Fund (FVALX) run by Thomas H. Forester which eked out a 0.4% gain (relative to an average 39% loss for all equity mutual funds).  A 0.4% gain sounds pretty unimpressive on the face of it, but viewed in the context of last year’s bloodbath, it’s easy to see why a positive return, any positive return, would be highly prized.  Predictably, Forester’s funds under management (FUM) has swelled by over $20 million since year end, according to Yahoo Finance, for a total of $68 million (a 41% increase). Well, good luck to Mr. Forester, but his chances of replicating this feat are slim.  In fact, we’ve been here before.

Remember The Kinetics Internet Fund?

Some of you might remember 1998’s best-performer, the Kinetics Internet Fund run by Ryan Jacob.  Jacob famously achieved an annual return of 196% in 1998 amid a firestorm of positive media attention.  The fund did alright in 1999 and then proceeded to lose over 80% of its value in 2000 alone.  The moral of the story?  What goes up usually comes down, and often in dramatic fashion.   Forester’s fund is likely to meet a similar fate, especially in light of the fund’s poor long-term track record.  In fact, the fund is already down 13% so far this year.  A diversified portfolio of low-cost index funds may be boring, but it works.