Stock Market Charts Rant…What They Really Mean
For many of us, we are visual learners or we benefit greatly by illustrated aids to understand a topic. When analyzing statistical data, it is often helpful to extract the raw data into clear charts and tables. In the stock market field, the majority of news outlets express the current market status with line charts displaying the addressed stock’s price history. But are these charts even helpful for investors of any size?
Stock charts aren’t completely useless. Most charts have the ability to show a set period of time for the stock’s pricing history. It can be a good source to see when the stock price was on a roller coaster to further research what issues may have caused a negative impact on the company’s performance. So, you are strictly looking at historical events that led to the price gains and declines. By no means does a stock chart forecast its future performance.
The line chart may be the first glance people take before even looking deeper at a stock. It may be the reason a person decides to further investigate the potential for the stock’s future. And this will lead you to the biggest unknown result. There are many everyday investors or even large investors who base an investment decision on a stock’s historical trends. I’m not going to say there is no true rationale behind picking a successful stock based on its linear chart performance. If people feel they have made solid returns from that approach, then good for them.
However, the majority of well-known, super successful investors would tell you there is no sound evidence that points to past performance dictating future performance. They would call you a bad investor if you used historical charts to estimate a company’s growth over time. And would question your accuracy on those decisions over the long haul. The greatest and most successful investors believe that a company’s business success and sustainability determines its future growth.
It’s hard to believe any smart investor debunking the idea of the business functions being the primary reason for a company’s success. The core financials and the company’s place in its market will provide the basis for whether it continues to grow, remain stagnant, or get passed by its competitors. The stock price isn’t correlated to the company’s revenue or net income, rather there’s multiple components that take place that can move the price up or down.
For investors who are frequent traders or quick profit seekers, then maybe the charts help you. Large national events can trigger massive movements in the stock market. So, watching for national crisis or historical events in the country can help gauge for wide movements in particular stocks. Not all stocks will be affected greatly by national events. This is more industry focused than the market as a whole. Being able to predict which industries, and then stocks that can be affected by major events can assist in capitalizing on market swings.
As for the buy and hold investors go, the historical charts mean absolutely nothing. They do not care about the frequent ups and downs of the price, rather they are focused on the future long-term grains, which a chart cannot provide. The revenue growth, income growth, dividend growth, or earnings per share growth cannot be viewed by a price chart. So, for the buy and hold investor the price charts are not even viewed, analyzed, or discussed as a basis of picking stocks for their long-term portfolio.
There are simply two methods to analyzing stocks: fundamental analysis and technical analysis. Fundamental analysis uses the components and financials of the company to determine its current value and estimate its future growth. Technical analysis isn’t concerned about a company’s financials, instead it is focused on the emotions of the market to understand what price movements will occur.
Fundamental analysis is the foundation for examining companies’ financials in relation to investing. It starts with evaluating a company’s financial statements; the balance sheet, income statement, and cash flow statement are used for quantitative analysis. It is solely about how well a business is performing and what determination can be made to estimate the stock’s future returns. Many leading investors study a company’s fundamentals to approximate how well they believe their return will be over time, rather than make a ball park guess based on its price chart.
Technical analysis revolves strictly on the jumps and drops of stock prices. As mentioned before, it is geared on the emotions that take place with investors that lead to large price movements. Technicians will tell you that understanding how a price moves is more important than its finances when it comes to the stock market. They believe to really make continuous profits you must analyze the technical aspect of a company’s price, opposed to its current or past financials. Stock charts are important to them to pinpoint what periods saw large peaks in prices, and then replicate that in the future.
An important, but missing component with many stock price charts is the omission of the dividends. Charts often do not include the gains from dividends. The majority of charts only show the stock price history and do not include such additions like dividends, interest, or disbursements. So, although helpful for technical analysis, the majority of price charts aren’t telling the full picture. Personally, price charts are completely meaningless for me, and anybody who is a buy and hold investor.