Streetwise

Lauren Rudd

Sunday, January 27, 2013

You Cannot Predict the Future

If you are going to invest on Wall Street, please be cognizant of the fact that there is no relationship between historical and future stock prices. The past will not predict the future unless you have the exact same initial conditions, which is impossible.

Does that mean you ignore historical data? No, you simply need to put the data in proper perspective. It is possible to ascertain, with a degree of assuredness, certain price pattern characteristics from which you can deduce with a degree of confidence the likelihood of a price movement in a specific direction.

Wait a second; didn’t you just say that the past cannot predict the future and that there is no relationship between historical and future stock prices? Yes, but you are not predicting the future. What you are doing is analyzing the one thing that investment prices have in common...that they are a reflection of the hopes, fears, optimism and greed of the market’s participants. In other words, the sum total of those emotions is what directs the price level of an investment.

As Garfield Drew noted in his book, “New Methods for Profit in the Stock Market,” the quoted price of a stock is never what the stock is worth but rather what people think it is worth.

Martin Pring wrote in his book, “Technical Analysis Explained,” the price of a share of stock is a reflection of the changes in investor attitude, while time measures recurrence of those changes and volume is essentially a measure of the intensity of those changes.

Because the price patterns of stock prices have been repeatedly analyzed and catalogued, technical analysis distills down to a self-fulfilling prophecy. If everyone believes a pattern means an investment vehicle’s price will rise, the upshot is an upward price move.

Therefore, your objective, via technical analysis, is to analyze the mood of the crowd and then take either a similar or a contrarian position. Unfortunately, whenever the price of a security draws an inordinate amount of attention there is also a tendency to lean on boisterous prognosticators for advice. That is a mistake. Never take the opinions you hear or read (including mine) to be the gospel.

Continuing with that line of reasoning, no matter how “in-favor” or “out-of-favor” a particular investment is never let anyone pressure you into a knee-jerk reaction. A person selling an investment is unequivocally biased. It does not matter how many letters they have after their name, how sincere they appear, or how long you have known them; they sell for a living. Always obtain an independent second opinion, either from your own research or from an unbiased professional.

Virtually everyone can learn to undertake at least a minimal analysis. Consider, for example, MWI Veterinary Supply, (MWIV). The Company is a leading distributor of animal health products both here and in the United Kingdom.

MWI sells both companion animal and production animal products, which include pharmaceuticals, vaccines, parasiticides, diagnostics, micro feed ingredients, supplies, pet food, capital equipment and nutritional products. MWI also is a leading innovator and provider of value-added services and technologies used by veterinarians and producers.

For its fiscal year ended September 30, revenues increased 32.6 percent, while earnings rose 25.6 percent to $4.23 per share. MWI's gross profit increased by 29.8 percent, representing 12.9 percent of revenues, while operating income increased 24.9 percent. Sales, general and administrative expenses were 8.3 percent of revenue.

The company’s share price rose 67 percent during 2012. For its guidance going forward, the company is estimating a 10.1 percent growth in revenue and earnings of between $4.66 and $4.80 per share.