Good information is critically important to making decisions about your investing. The problem is, there is so much "noise" out there that it can be difficult to focus on the few things that will be the most helpful to you. So the default setting for most investors is to look at history.
The history of the market: what happened last year, the last 10 years. The history of the stock you're considering buying: the most recent quarterly earnings, last year's results, how much it's up (or down) in the past five years.
Unfortunately, that type of history will not make you a better investor. How many times have we been told that "past results do not guarantee future performance"?
This is why at The Market Forecast we ignore almost all news--it concerns itself with what has already happened. And it's not useful, because we can't change it or act on it. We want to know what's going to happen next. Read the news for entertainment, not stock market prediction.
Jason Zweig of The Wall Street Journal reveals one of the greatest pitfalls of relying on history: What if the accepted history is just plain wrong?
He writes that even though U.S. stocks as a whole have underperformed the long bond for the past 5, 10, 15, 20 and 25 years,
"Still, brokers and financial planners keep reminding us, there's almost never been a 30-year period since 1802 when stocks have underperformed bonds.
"These true believers rely on the gospel of 'Stocks for the Long Run', the book by finance professor Jeremy Siegel of the Wharton School at the University of Pennsylvania that was first published in 1994.
"Using data assembled by other scholars, Prof. Siegel extended the history of U.S. stock returns all the way back to 1802. He came to two conclusions that became articles of faith to millions of investors: Ever since Thomas Jefferson was in the White House, stocks have generated a 'remarkably constant' average return of nearly 7% a year after inflation. (Adding inflation at 3% yields the commonly cited 10% annual stock return.) And, declared Prof. Siegel, 'the risks of holding stocks decrease over time'."
"There is just one problem with tracing stock performance all the way back to 1802: It isn't really valid...The 1802-to-1870 stock indexes are rotten with methodological flaws.
"Another emperor of the late bull market, it seems, has turned out to have no clothes."
Read the entire article at
http://finance.yahoo.com/news/Does-StockMarket-Data-Really-wallstreet-2749436021.html?x=0&.v=4
So, which history do we use?
Cycle analysis is the only tool we have found to be accurate in predicting the markets. Then we confirm with a handful of useful technical indicators, including the 5-, 30- and 50-day moving averages, along with volume. And we employ our crossovers for intraday and short-term trades.
That's it. Everything else is just noise, or entertainment.
