Bias for action. Gets things done. Go-getter. Traits companies big and small look for. And for good reason, you're being hired to do things! However, action is a secondary step that often overshadows the primary step, direction. Clear direction is the foundation that enables our actions to takeoff. Without it, we're stuck in the mud. Striving for clarity is an underrated skill. Having the courage to ask ( seemingly ) obvious questions, and to check in, making sure we're all on the same page. "O bvious " questions are a low risk, high reward way to add value. At worst, you'll add confidence to our actions. At best, you discover a misalignment that saves us from a dead-end. The more people, the more clear we need to be. The bigger the initiative, the bigger the risk of reaching the finish line, only to realize expectations were off. Success is always uncertain. But we can be certain about what we want and what everyone's job is. Things that can be clea
Morningstar is renowned by professionals for their research and insights. For us everyday investors, we might recognize their signature 5-star rating system. Big banks love to brag about their stars! But do more stars equal more returns?
The rating is fairly simple. Morningstar groups funds with their peers. Funds that have beaten their peers will get 4 to 5 stars, funds that underperformed will get 1 to 2.
Based purely on historical data, it doesn't do much in predicting the future. Past 5-star performance doesn't equal future 5-star performance.
The Wall Street Journal studied thousands of funds since the star rating's inception (2003-2017) and it was clear that top-performers don't persist. Only 12% of 5-star funds did well enough over the next five years to earn the top rating. 10% of past top funds did so poorly they ended up with an 1-star rating.
This is consistent with SPIVA's findings on persistent performance, top performers from one period are unlikely to keep it up in the next.
The stars are an interesting data point but shouldn't to be used in isolation for investing decisions. Morningstar themselves acknowledge this.
"Because the Star rating is only based on past performance it should not be the sole factor in making an investment decision". - Morningstar
"Advisors" however treat stars like the holy grail. Shoving them in our faces to show how talented their managers are. It's a trick!
Big banks operate hundreds of funds at a time. Through sheer luck alone some are bound to get a 5-star rating. Winners are sold hard, while losers are brushed under the rug. When 5-star funds underperform and move down the scale (as they likely will), the banks will draw your attention to others that have moved up. Rinse and repeat.
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