May 1, 2020

Never trust investment performance

Who doesn't like to ask about the returns achieved by an investment strategy? Unfortunately, this question is dangerous, because good returns can mean that the strategy has just reached the end of its life cycle (see also the insight that good returns are bad). Those who understand this should only invest in investment strategies that currently have a poor return. And who does that?

When measuring performance, the risk of a stock is usually expressed as a deviation from the middle of the market, usually a benchmark index of stocks. Professionals talk about risk-adjusted returns or Sharpe Ratio.

However, these ratios are often misleading for long-term investors, as a deviation from the market may be desirable. For example, when renewable energy stocks deviate from a market index dominated by oil, gas, and coal, we would find this desirable, wouldn’t we? In this case, the 'risk' for renewable energies is shown to be high because of the market deviations, although actually, the opposite is the case.

You should be skeptical about investment performance not only for these reasons, but also because a few years of investment returns hardly mean anything, as Obermatt CEO Dr. Hermann J. Stern points out in this part of his oikos conference '19 Keynote at the University of St. Gallen.

Recorded by Obermatt with kind permission of oikos St. Gallen, November 2019.

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