Past History Is No Indication
Of Future Performance
Timothy C. Schewe
What a load of bull. Legalese designed to protect the broker or financial planner against lawsuits down the road. All any analyst has to say is “..past history is no indication of future performance” and these experts are off the hook.
The fact is, past performance is an indicator of future activity if you know what to look for. Chartists – technical analysts, rely almost entirely on a stock’s past performance to make their picks. These analysts don’t care about a company’s balance sheet, products in the pipeline or management hierarchy.
Instead, they examine a company’s chart looking for repeating movements up or down – patterns of activity. And you don’t need an MBA from Wharton to figure out patterns that show up in stock prices. For example…
…if the stock price falls off every time share price hits $5.00 per, you’ve identified the resistance level – the level at which buyers turn into sellers. This is the top end of the selling range.
Conversely, if the share price never dips below $3.75 a share, you’ve found the support level – the price point when buyers move in, take positions and hold on until share price reaches the $5 resistance level where a sell off can be expected.
With the support and resistance levels defined (nothing is etched in stone – these are indicators, not hard-and-fast laws of physics or economics), you’ve established the trading range – from $3.75 up to $5.00.
Another thing a company’s chart shows is daily share volume traded. Small and micro-caps are often thinly traded – especially as share price declines. However, once a trend toward increasing volume is established (one day does not a groundswell make) remember, the trend is your friend. Follow the stock up on higher volume – but only when the price is trending upward. If the daily volume numbers increase as share price is declining, we’re seeing rats leaving a sinking ship.
Now there are lots of people who disagree with these basics. Contrarian investors sell when others are buying and buy when others are selling. Momentum investors look for that one stock that’s captured the interest of an analyst and is moving up on increased buying activity. If investors are buying when the stock is climbing in share price, that’s viewed as a sign of longer-term strength in share price.
Alone, charts indicate upward and downward trends because stock markets follow predictable patterns based on macro-economic factors. Oil hits $150 the barrel, that’s a macro-trend and small gas and oil companies will benefit from that trend.
Mix your technical and fundamental analysis
I’ve said it many times before: Knowledge is power, and the dust-up between those investors who only watch charts and those who pore over financial statements is moot. Both a stock’s fundamentals (right market, right product, right time) and the company’s chart can be examined carefully to (1) identify buy signals, (2) identify sell signals, (3) identify companies with promising products coming to market and the financing to make it happen – information contained in the company’s annual report and prospectus.
Any investor who chooses to ignore information regarding a potential buy or sell – regardless of whether that information “fits” a particular investment style – is an ostrich with head embedded in the sand.
Use all of the information available to you – charts, annual reports, analysts’ reports (taken with a grain of salt) and macro economic activity – to create a complete picture of company prospects before taking a position.
And any advisor who tells you that “past performance is no indicator….” gets the boot. Remember, those who fail to learn from the mistakes of the past are doomed to repeat them so learn from the past and avoid the mistakes.
Think about it.
Tim
