When I trained brokers at Paine Webber we used to bring in mutual fund wholesalers to pitch us their latest and greatest funds. It was an optional meeting and had good attendance. After all it was a free lunch without leaving the building. One day out of frustration, I told the wholesaler we wanted to do something different today.
“Normally you come in here and tell us about the latest and greatest fund that you have. We go out and sell your best fund to our clients and all too often, it turns out to be your worst performing fund. Let’s do something different today,” I said. “Tell us about your worst performing fund and maybe it will turn into your best performing fund.”
Of course that was said out of frustration but there is more than a grain of truth to this. You can call it reversion to the mean or just plain contrarian but it works better than chasing yesterday’s performance.
In an analysis of how well this strategy or lack or reverse strategy works, I reviewed 2011’s worst performing investments and where were they today, 2 1/2 years later. Here are the results. Even I was shocked. They averaged an 86% return.
