If you’re a believer in efficient markets and that “good performance” means exceeding an arbitrary benchmark (such as the S&P 500) then you’re done reading. Please step outside.

If however you believe that price doesn’t indicate value then read on.

As we’ve written about numerous times price is not an indicator of usefulness or utility. Whether a loaf of bread costs $1.99 or $2.99 it’s the same flour and water.

Similarly investments results are not an indicator. They are a measure.

Why the distinction? Is it semantics? Consider Goodhart’s Law. To paraphrase famed British economics professor Charles Goodhart:

“When a measure becomes a target it ceases to be a good measure.”

Any index is just that – a measure. It does not reflect value or fundamentals. Instead it is a proxy – a measurement of underlying activity. It is not meant to be nor is it an exact explanation or translation of value.

It’s no different than temperature. The human body is “normal” at 98.6°F. Does someone with a slightly higher or lower temperature add more or less value to society? As preposterous as that question is we apply the same logic when we consider investment results. We look at the level of an arbitrary index relative to our investment portfolios and suggest it tells us something meaningful. Nonsense.

Consider the equity markets over the past couple of years. While the proverbial rising tide has raised all boats some are up more than others. In particular so-called riskier stocks (those that rely heavily on borrowing and, thus, have benefited from cheap rates in the credit markets) have outperformed “safer” stocks – those from companies that produce useful goods such as toothpaste and other consumer goods. Similarly sectors with heavily indebted balance sheets such as energy, real estate and utilities have “done well.”

The laggards? Yup, it’s been “quality” companies – those that are highly profitable, throw off lots of cash and have bulletproof balance sheets. Think Coke, Exxon, Microsoft and J&J.

If you’re a holder of these stocks are you going to sell them because they aren’t “good” stocks? After all they haven’t kept pace with the S&P 500.

Similarly if you hold a mutual fund that owns these stocks are you going to sell? After all the manager hasn’t kept pace with the S&P 500. Clearly the mutual fund manager woke up one morning and suffered a bout of stupidity. He or she has lost their touch. More nonsense.

Are we laying it on thick? Yup. Is it intentional? You betcha.

The point is as always – using price as an indicator says NOTHING about the underlying reason for ownership, about the process that goes into deciding what to buy/hold/sell, etc. To make long-term decisions one most focus precisely on these things – not on comparative measurements. And let’s face it…isn’t all prudent decision-making the type of thing that should be done with a focus on the long-term?

Here’s an example. Vanguard Dividend Growth is a mutual fund offered by the perceived gold standard and first family of the mutual fund world. This large-cap blend fund focuses on the stocks of quality companies. In the upheaval of 2008 this fund outperformed 97% of its peers. Conversely in 2013 it lagged 55% of its peers and YTD it’s underperforming 72% of its peers.

The answer is clear. Throw all intelligent thought out the window. Act first, think second. “Ready, fire, aim!” Go ahead and dump the fund. That’s right, let’s go chase performance. Let’s go find a fund holding Netflix. Then when the inevitable market volatility rises we can suffer outsized losses relative to the more stable Vanguard offering.

Here are some rationalizations and bromides to get us through the ugly feeling we’ll have when we want to avoid owning our decision to chase performance:

1) The markets are rigged.
2) No one told me when to “get out” or “get back in.”
3) I don’t have an app for that.
4) Jupiter and Saturn were out of alignment.

It’s a painfully simple truth yet so many of us refuse to accept it. Performance measures such as the level of an index are just that – measures. To turn measures into targets and then make decisions based upon them is a loser’s game.