No indicator of future returns
The late Benjamin Graham, globally renowned value investor and author, was of the opinion that past performance is useful in calculating the value of a mutual fund only so far as it is indicative of what is to come in the future. The key word being ‘indicative’.
Think about it. A student who receives straight A’s throughout his entire academic career isn’t guaranteed to repeat this performance going forward. Having admitted that, it does give us some clue as to what one might expect in the future. In the same way, past performance plays a very important role in providing useful information in identifying future winners. However, it is absolutely no guarantee for future success. Performance data is remarkably informative but its predictive power is limited.