Our Goal Is Picking "Winners"

If you've ever read any of the disclaimers or legal statements on just about any investment advice, you've probably heard this line.

"Past performance is no guarantee of future results."

This statement is boilerplate... It's typically used when talking about investment strategies and mutual funds.

In theory, it makes a lot of sense: Just because a fund manager or company performed a certain way in the past doesn't necessarily mean they will do so in the future. The world will change... and perhaps the results will change also.

But in reality, does this idea make a lot of sense?

When companies are in a great strategic and competitive position – especially if they're in long-term growth industries – good performance is a great predictor of future good performance.

When we discuss picking stocks, we often speak about picking "winners."

These are companies that have shown consistently high earnings growth and the ability to outperform investor expectations, which they often continue to do. This may reflect their underlying positioning, industry, or the execution of the management teams.

Often – and ideally – it's reflective of all these factors.

While it seems prudent to issue a disclaimer that the future may not look like the past, big trends, at least the ones that can make you the most money, tend to last for a very long time.

It's better to say that while past performance is not a guarantee of future performance, it often can be a good predictor of it. One of the best investment strategies is to go out and discover where this is true.

When looking at companies, it's crucial to deconstruct why a company has performed so well in the past.

Have you ever taken a loss when investing in a company based solely on past performance - and more importantly, do you understand why this happened? Let us know in the comment section online (scroll to the bottom of the post).

One of the biggest drivers of financial results is economic sensitivity. Most companies have some sensitivity to the economy. A rising tide generally does raise all ships and a recession is a hard environment for most businesses to grow and beat expectations in.

When considering a company's track record, you first must examine the sustainability of that track record.

Mature industries – like manufacturing and retail – tend to be more economically sensitive. For instance, when we see an increase in steel demand, the economy tends to drive it.

These industries can experience great periods of performance, but you're better off buying stocks in this category when they are doing horribly rather than fantastically.

Check out Enrique Abeyta’s conversation with Howard Lindzon - entrepreneur, hedge fund manager, and founder of Stocktwits.

Howard explains direct-indexing, and why it’s for the masses, as well as thoughts on AI, why he picked Apple decades ago, all the while reminiscing on the good old days of the blackberry.