In a story reported by Eleanor Laise, The Wall Street Journal on December 31, 2009 recounted the saga of the best performing mutual fund of the decade which ended that day. However anecdotally, it is the single most ringing validation I’ve ever yet seen of the core principle of all my work, and the spine of my most recent book, Behavioral Investment Counseling.

The winning fund was the $3.7 billion CGM Focus Fund—I must be exquisitely careful not to mispronounce it—and according to the WSJ, citing research by Morningstar, it returned (through December 29) 18.2% a year for the decade just then ending. This achievement (in a flat to down market) is all the more remarkable because the said fund totally smoked the second-best performer by an astronomical 340 basis points. (The second-place finisher, if anyone cares, was Lord Abbett Micro Cap Value I, at 14.8% per year.)

But you must not chide yourself for missing it. So did literally everyone else, including—and especially—the CGM Focus Fund’s average shareholder during these ten shoot-the-lights-out years.

For you see, dear reader, the average shareholder in the fund during the decade—based on the fund’s critically important dollar-weighted return—managed to rack up a loss of 11% per year.

I didn’t say that, friends. Morningstar did.

Lest you think this epic negative achievement mathematically impossible, let me sketch out how it might have happened…and, in point of actual fact, did. You see, in 2007—the all-time tippy, tippy top of the equity market—the CGM Focus Fund returned a blazing 80%. Whereupon "investors" poured $2.6 billion into the fund during the ensuing year, even as the fund went down 48%. "Investors" had pulled out three quarters of a billion dollars by November 30, 2009. I invite you to look up the year’s total net withdrawals at your leisure, should you care to; my point is made. (Calling these people "investors" is like calling unemployed people who bought $100,000 trailers with $105,000 NINJA mortgages "homeowners." But I digress.)

If the fate of William Miller and his Legg Mason Value Trust did not teach us for all time that performance-chasing is a virtual guarantor of substandard performance, then please, please let the CGM Focus Fund do it. Torrid performance always brings in grotesque amounts of stupid money, forcing the purchase of most of a fund’s assets at the worst possible prices, and thus insuring that whatever is drawing all that hot money must underperform in the next block of time. (If you still doubt this, just watch the gold ETF.)

There is no statistical evidence for the persistence of performance. (Unless—as I strongly suspect but can’t prove—there is…and it’s perverse.) No excellent advisor allows (that is, enables) his clients to chase performance. It’s professional suicide: the "client" will underperform, and blame the advisor. When you get drawn into a discussion of past performance, take your medicine now: deny categorically that it means anything predictive; recommend what you recommend because you’re recommending it; and let the chips fall where they may. The only alternative is to fold, let the "client" buy the hot fund or funds he has his eye on—and get criticized to death over the next couple of years for the funds he alleges you put him into.

Through December 31, 2009, the saga of the best performing fund of the decade proves one thing, and one thing only. The dominant determinant of real-life, long-term investment outcomes is not investment performance; it’s investor behavior.

Now, where have you heard that before?