Chasing Shadows: The Michelin Star Illusion

Imagine you’re the owner of a restaurant. After years of dedication, your efforts are finally recognized—you’ve earned a Michelin star, the ultimate accolade in the culinary world. For a moment, you feel like you're on top of the world. Your restaurant is suddenly flooded with more reservations than you can handle. The spotlight is on you, and everything seems perfect.

But soon, the problems begin. Customers’ expectations skyrocket—they’re not just coming for your food; they want the full 'Michelin-starred experience.'

The pressure to constantly impress becomes overwhelming. Not only do your guests expect perfection, but suppliers see an opportunity to hike prices, and staff demand higher salaries, knowing they work at a Michelin-starred establishment

The Michelin star, once a dream, now feels like a burden. According to research, many Michelin-starred restaurants in New York have closed within a few years of receiving the coveted award. They couldn’t handle the pressures, costs, and shifting dynamics that came with that sudden rise to fame.

This paradox of success—where achieving the pinnacle of recognition leads to unforeseen challenges—applies to more than just the restaurant world. It’s a story that can resonate with investors too.

Chasing Past Performance in Investments: The Michelin Star Effect

In the world of investing, we often fall into the same trap. We get seduced by the allure of past performance.

We look at the recent winners—the funds or stocks that have delivered phenomenal returns—and feel an irresistible urge to invest. Much like a Michelin star elevates a restaurant’s status, recent stellar performance draws in investors, making them believe the success will continue.

Like Michelin-starred restaurants, investors face challenges when chasing the 'stars' of the financial world. The moment an investment performs well, investors flock to it, expecting the success to continue, without realizing that much like restaurants, past winners are burdened with future pressures.

Consider how people behave when they see the performance of a Defence Fund or a PSU Fund that has delivered incredible returns over the past year. There’s a rush to invest, driven by the hope that these funds will keep performing as they have. Or when investors see the mid-cap and small-cap funds in their portfolio delivering exceptional returns, they’re tempted to pile in more money, expecting the growth to continue.

But here’s the harsh reality: much like the pressures of a Michelin star can weigh down a restaurant, past performance in investments is not a guarantee of future success. In fact, the opposite is often true.

The Lure of Big Returns

That’s the first—and often the only—question many ask before making an investment: “What has this fund returned in the past year?”

Why?

Because we’re wired to believe that those returns are indicative of what we’ll receive in the future.

• If an investment has gone up 25%, we expect another 25%.
• If an investment has doubled, we expect it to double again.
• If an investment has gone up 10x, we expect it to be a 10-bagger once more.

The more extreme the performance, the more likely we are to chase past returns at the worst possible time.

This emotional response is dangerous because it leads us to chase trends—just as people flock to Michelin-starred restaurants expecting excellence, investors chase high-returning funds, believing that momentum will continue.

The Data Speaks: Winners Don’t Always Stay on Top

Let’s bring in some hard facts to further illustrate the risks of chasing performance:

• Only 1 out of 4 top funds remains in the top tier over the next 3 years.

This data shows that chasing performance is a risky strategy. Funds that shine in one period often underperform in the following years. Much like Michelin-starred restaurants facing the burden of their success, top-performing funds face their own challenges—whether due to market cycles, shifting strategies, or competition.

Avoid Chasing Performance: Present Winners May Not Have Been Past Winners

The story of Michelin-starred restaurants illustrates the dangers of chasing past investment returns. Present winners may not have been past winners, and those who perform well today might struggle to maintain that success. As investors, it's essential to focus on a disciplined, long-term approach, prioritizing diversification and asset allocation over the allure of past performance.

Don't let the illusion of past success cloud your judgment. Instead, concentrate on building a well-diversified portfolio aligned with your financial goals. If you're interested in discussing how to create a tailored investment strategy, connect with me here https://calendly.com/ravinagrani