Historical Prices Are Meaningless

by | Feb 14 at 8pm | Investing | 0 comments

There’s a disclaimer at every stock exchange in the world. It reads something like “historical prices are not an indication of future performance.” Newbies will often look at a stock that once traded at a very high price and believe it will eventually return to that price (that was me, I’m newbies). Yet stock prices are determined by how much profit that particular company will make in the future.
 
The main reason why looking at historical indications of price is meaningless is because the environment in which we invest is always changing. There are seldom two identical periods in our modern history, so comparing a stock price of one period to the price of the same stock in a different period is pointless. The environments are ever changing.
 
For instance, it doesn’t matter if “September is a historically good month for stocks”, especially in the midst of a pandemic. There was no pandemic in 2013, so comparing the stock price performance in August 2013 to August 2021 is meaningless.
 
These are the same indicators that are used in Technical Analysis, which is the analysis of prices only using graphs and chart patterns, rather than formulas and equations. Trends in the graph can indicate what future prices may look like if the environment stays the same. That’s because those trends indicate at what prices do people feel comfortable buying or selling a particular stock. But when the environment changes, people may feel differently.
 
Someone who once felt comfortable buying Apple stock at $120 may not feel the same way during a Pandemic if Apple isn’t expected to do very well.
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