One of the most common phrases when it comes to investing in (ASX) shares is that past performance is not a reliable indicator of future performance.
On a surface level, I certainly think it's wise to be cautious about extrapolating great returns to continue over the next year or so. For example, the Telstra Group Ltd (ASX: TLS) share price rose by 20% in 2025 and I'd suggest it's unlikely (but not impossible) that the huge ASX telecommunication share will rise by another 20% this year.
However, past business performance could be very informative of future returns. Let me explain what I mean.
Winners tend to continue winning
There are not many businesses that have a track record of delivering very strong returns over the long-term.
Those exceptional companies have managed to deliver such strong performance, likely because they have market-leading products and services, as well as compelling economics.
These appealing advantages don't disappear overnight, if ever. In my view, the great winners tend to continue winning over the years because what has helped them thus far will mean they can continue their track record.
Just think about names like Xero Ltd (ASX: XRO), Wesfarmers Ltd (ASX: WES), Breville Group Ltd (ASX: BRG), Nick Scali Ltd (ASX: NCK) and TechnologyOne Ltd (ASX: TNE). Each of them have long-term track records of executing their strategies successfully.
So, while we can't know for sure what their future share price returns will be (particularly in the short-term), I do think it's clearer whether a business will continue growing its operations and earnings.
Cyclical opportunities
Investors can use volatility to their advantage, particularly when it comes to ASX shares with cyclical earnings.
Commodities are a good example – if a resource price falls then that may lead to some investors selling and the share price falling. However, resource prices don't fall forever. At certain levels, higher cost producers may start entering loss-making territory and lead to them turning off production, helping the supply-demand balance and potentially helping spark a recovery in the resource price.
That's why it can be fruitful to invest in ASX mining shares when prices are down heavily and conditions are weak. Investors can buy low, hoping to benefit from a turn in the cycle.
It can be a similar story when it comes to other cyclical sectors such as retail.
But, investors should also be cautious about overpaying for cyclical names when conditions are positive. That's why I'm being cautious about ASX mining shares like Fortescue Ltd (ASX: FMG) and Rio Tinto Ltd (ASX: RIO) at the current valuations.
