Is Past Performance a Guide to Future Performance?

Too often I see investment firms having to point out that "past performance is not a guide to future performance". I take issue with this statement because the entire investment industry is based on using historical data to try to predict the future.

Look at any financial ratio for analysing companies. Whether it is price-to-earnings, price-to-book, free cash flow yield, return on capital employed, Sharpe ratio, etc., all of these measures look at the past financial performance of a company and/or its share price.

• How do people assert that passive funds are more likely to outperform active funds? Past performance.
• How do we know that government bonds are usually safer and less volatile than company shares? Past performance.

Past performance definitely should not be solely relied upon. Logic and reason can also explain that passive investing is often better because it's cheaper and/or more diversified. Government bonds are usually (not always) safer because paying back the bondholder is easy when you have the power to tax, borrow and print more money.

But if past performance consistently showed that active management is generally superior and that government bonds are usually riskier, then our logic would need to be reassessed.

We should be using this phrase instead:

Past performance is not a guarantee of future performance.