How to invest basis historical performance: 3 principles for better returns | The Financial Express

The art of investing basis historical performance: 3 principles you should follow for better returns

Investing basis historical performance is not completely incorrect, but investing solely on the basis of that makes your investing success a subject of chance.

The art of investing basis historical performance: 3 principles you should follow for better returns
Historical data is simply an acquaintance; historical data with context is a dear friend.

By Nirav Karkera

Investing basis historical performance is the easiest way to make investment decisions, especially with equities. But easy is as far as this approach goes. The road leads to nothing in the vicinity of effective or successful investing.

Think about the fundamentals of equity investing. Buying equity shares of a certain company implies investor belief that the company will deliver greater value to shareholders in the future. Prevailing prices of the same share reflects its perceived value fully considering all that it has achieved so far, and partially, expectations of its future.

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There’s a popular story about famed ice hockey player, arguably the greatest during his time, Wayne Gretzky. It is said that about a couple of years back, during a game between the Boston Bruins and Edmonton Oilers, announcers decided to interview players including Wayne Gretzky. Fully aware of Gretzky’s reputation as an exemplary player in the league, an announcer declared that Gretzky was not the biggest, strongest, toughest or fastest player in the league. The statement was followed by a question asking Gretzky to explain his own genius.

“I don’t go where the puck is; I go where the puck is going to be”, replied Gretzky.

Read that again, slowly. Contextualise the value of that statement in the world of investing. As an investor, you do not want to be chasing companies solely on the basis of how they have performed in the past. You want to be invested in the companies that have the potential to make it big in the future. 

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Investing basis historical performance is not completely incorrect, but investing solely on the basis of that makes your investing success a subject of chance. Here are a few principles that will help an investor basing decisions simply on historical performance to do it better.

Use history for the future

You want to travel with an all-star pilot in a swanky jet, not simply greet the pilot after she has landed the jet at the destination. Now here, it is important to know that the jet has offered fantastic rides in the past. But you must hop onto it only if you know it has what it takes to deliver yet another one. This is exactly how historical performance must be perceived while making investing decisions.

Historical performance offers a strong vantage point for an investor seeking to investigate the workings of a company. Often, sharp swings in prices of a company’s share is associated with developments and perceptions of its effects. Developments could be related to a company’s external or internal environment while the perception of effect could be positive, neutral or negative. An investigation into the cause and effects of such turning points offers deeper insights into the management, vulnerabilities, strengths and priorities of the company. A nuanced understanding of these attributes in conjunction with prevailing context helps investors better gauge growth prospects that lie ahead of the company.

An identity takes more than a first name

Just knowing the first name of a person leaves you no better informed about the person than you were without the name. There is a whole lot more that needs to go along with the name for you to understand a person. The difference is akin to that between an acquaintance and a dear friend. It is incredibly difficult to lend a sizeable amount to an acquaintance, but not so much to a dear friend.

Historical data is simply an acquaintance; historical data with context is a dear friend. It should be tougher to invest because an acquaintance said so, but there could be some merit in hearing your friend out. While understanding past performance, it is imperative to know the ‘why’, ‘where’ and ‘how’ that led to the ‘what’ and ‘when’. Prioritise context.

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History does not repeat itself, but it rhymes

“History repeats itself” is an oft-quoted phrase that soothes many frayed nerves in the VUCA world. However, it serves limited purpose when it comes to application in real life. If history actually repeats itself, presuming it implies exact repetition and that there is no other kind of repetition, it would directly contradict principles of evolution, innovation and progress. The key tenet of these principles is that the next moment will be different from the current moment and hopefully better.

Just because stock prices reacted in a certain situation in a certain way in the past does not effectively imply that the same scene will be recreated if a similar situation was to recur today. Because the world, economics, and participants today are very different from what it was back then. A different ecosystem warrants different ideologies that will most effectively result in different outcomes. History must be studied as one would study fundamentals and concepts instead of carrying it around like a crystal ball.

For an investor, historical performance is as good as a part of a warrior’s armour – necessary, but does not dictate absolute victory.

(The author is Head of Research at Fisdom. )

(Disclaimer: Views expressed above are those of the author and do not reflect the views of financialexpress.com. Mutual fund and stock investments are subject to market risks. Please consult your financial advisor before making any investment decision)

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