What Am I Paying You For?! Analysis vs. Forecasting

Let’s face it: when it comes to choosing investments, we’re suckers for a good track record. There’s something irresistible about funds and asset classes boasting strong recent returns.

This trend, as persistent as it is puzzling, can be a double-edged sword. Why? Because past performance is just that – the past. It’s not a golden ticket to future gains.

Think of it this way: past success in investing is like yesterday’s weather. It was great to bask in the sun then, but it doesn’t guarantee sunshine today. High returns in the past often mean the asset has become pricier, setting you up for potential disappointment.

Active fund selection is where this behavior shines brightest. We idolize star fund managers, assuming their past glory days predict future success. It’s like believing a winning lottery ticket holder has the secret formula.

We overlook the cold hard facts of market valuations, the inevitability of mean reversion, and the fickleness of luck.

This fixation isn’t limited to fund managers. Take the rush for US equities after a decade of impressive performance. Investors acted as if past success was a crystal ball into the future, ignoring the more likely scenario that what goes up must come down.

So, why do we fall for this? First, there’s our tendency to believe that recent trends will continue. We love a good story, and when assets perform exceptionally well (or poorly), narratives emerge to justify these results, reinforcing our belief in their sustainability.

Then, there’s outcome bias. We see strong performance and instantly associate it with inherent quality. It’s like assuming every top-charting musician is a musical genius.

And let’s not forget the allure of instant gratification. Investing in trendy market areas offers immediate satisfaction, a sharp contrast to the delayed reward of more measured approaches. But remember, if it’s easy and feels too good, it’s probably not the best investment strategy.

However, there’s an exception: systematic trend-following strategies. These are strategies we implement for our clients at Luthuli Capital to ensure a sustainable, long-term track record. It’s based on analysis and shuns forecasting.

These strategies work not because they’re based on past performance, but because of disciplined, rule-based application. Unlike the haphazard, emotional decision-making of many investors, these strategies are about sticking to a plan.

Systematic trend-following strategies are a distinct approach in investment management, characterized by their methodical and disciplined nature. Here’s an expanded look at what they entail and why they can be effective:

What are Systematic Trend-Following Strategies?

  1. Data-Driven Approach: These strategies rely on quantitative data rather than subjective judgments. They use historical price data and market trends to make investment decisions.
  2. Rule-Based: They follow a set of predefined rules. These rules dictate when to buy or sell assets based on specific market indicators, like moving averages or price breakouts.
  3. Responsive to Market Trends: The core principle is to capitalize on the momentum in the market. If a trend is upwards, the strategy might involve buying and holding assets until the trend reverses.
  4. Diversification: They often involve investing across a range of asset classes and markets, reducing risk through diversification.

Why Are They Effective

  1. Emotionless Decision-Making: By sticking to predefined rules, these strategies eliminate emotional biases that often lead to poor investment decisions.
  2. Adaptability: They are adaptable to changing market conditions. The systematic approach allows for quick response to market trends, either capitalizing on or protecting against them.
  3. Risk Management: Effective risk management is integral to these strategies. They often include predefined stop-loss orders and adjust positions based on market volatility.
  4. Historical Success: Historically, trend-following strategies have performed well during various market conditions, especially during market downturns or crises.

Long-Term Benefits for Investment Managers

  • Consistent Application: The consistent application of rules helps in delivering more predictable and stable results over time, as opposed to more speculative or judgment-based approaches.
  • Reduced Impact of Market Cycles: By following market trends and not trying to predict market movements, these strategies can potentially reduce the impact of market cycles on the portfolio.
  • Performance in Diverse Market Conditions: Systematic trend-following can perform well in both rising and falling markets, depending on the trends being exploited.
  • Client Trust and Confidence: The transparency and predictability of this approach can build client trust. Clients appreciate a strategy that is based on rules and evidence, rather than speculation.


Systematic trend-following strategies offer a disciplined, data-driven approach to investing that can mitigate emotional biases and adapt to changing market conditions. Their effectiveness in risk management and ability to capitalize on market momentum make them a viable strategy for investment managers aiming for sustainable, long-term results for their clients.

While not foolproof, these strategies provide a framework that, when applied consistently, can lead to steady performance, making them a valuable tool in the arsenal of investment strategies.

In conclusion, while past performance can’t be entirely dismissed, it shouldn’t be the North Star guiding our investment decisions. It’s essential to approach high-flying past performers with caution, not confidence. Remember, in the investment world, there’s no such thing as a sure bet.

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