Streetwise

Lauren Rudd

Sunday, January 12, 2014

Put Wall Street in Proper Perspective

If you are going to invest on Wall Street, please be cognizant of the fact that there is no proven relationship between historical and future corporate share 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.

The sum total of those emotions is what directs a stock’s share price. In other words, what you are seeing is supply and demand reaching continually changing states of equilibrium. More specifically, I have it, you want it and so we agree upon a price and a transaction takes place. It is as simple as that and it happens thousands of times each day.

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. I would not argue with that.

Because the price patterns of stock prices have been repeatedly analyzed and catalogued, technical analysis distills down to a degree of 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 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, preferably from your own research.

Yes, virtually everyone can learn to undertake at least a minimal amount of investment research. A good place to start might be MWI Veterinary Supply (MWIV). It is one of the companies I mentioned in my list last week. The company is a leading distributor of animal health products.

When I wrote about MWI a year ago, my earnings estimate for fiscal year ended September 30, was $4.75 per share with a 12-month price target of $128. So how did the company do? Earnings for the year came in at $4.95 and the shares recently closed at $175.33.

MWI’s guidance is for FY 2015 revenues of $2.89 to $2.94 billion, representing a growth rate of 23 to 25 percent, while earnings are projected at $5.47 to $5.67 per share, an increase of 10.5 to 14.5 percent year-over-year.