Written By: Milja Mieskolainen
This post takes on a thoughtful approach and discusses the connections between the history and future of companies. The purpose is to provide perspectives and arouse interest. So, this post will not be full of facts but rather takes a relaxed approach and gives food for thought.
The first thing to note is that before you start thinking about your own approach, you need to figure out what you are looking for. Endless fluttering in the middle ground between history and the future does not usually lead to good results. Of course, it is good to do an overall assessment of the situation, but this assessment often does not provide enough basis for an investment decision. Therefore, for example, a top-down approach may be best: After an initial review, you start to analyze the industry, look for comparison companies and slowly move towards more detailed information. If, on the other hand, you directly jump to last year’s balance sheet without any benchmarks or picture of the context, the conclusions you make are often inefficient.
The history (or track record) of companies plays a big role in investment decisions, as no one wants to invest in a company that has only made losses in recent years. However, it is not that simple, as there are as many histories as there are companies. For example, an investor may have a strong belief in a StartUp company and invest in it even if they have made losses. However, faith alone is not enough to guarantee a good investment. Hence, many investors rely on key figures calculated from historical data and use future prospects as well as their own preferences to support decision-making.
The most important thing for an investor is to use the parts of the company's history that are important to his or her own investment strategy. For example, one general strategy is to build a portfolio around growth companies and focus on researching them. In this case, the investor interprets the growth of historical net sales and earnings and estimates future growth potential. Another strategy is to invest invest in companies whose dividend yield is higher than average in their chosen investment horizon. A strong and growing dividend history and the dividend yield are essential figures for this strategy.
History is a broad concept. If you as an investor want to start researching an individual company, you should first choose a single starting point, and start expanding the analysis in small steps. For example, it can be said that a good starting point is to get acquainted with the company's past key figures. On the other hand, other investors find it easier to start from qualitative analysis by utilizing publications such as annual reports and other investor communication, and only then delve into key figures.
History really doesn’t tell everything. As we have seen during the corona crisis, the soaring growth of recent years has no effect on the current outlook for certain companies. It would be great if investors had a time machine or a crystal ball to look at the future with. This is not possible, at least with current knowledge, so we need to focus on concrete facts, even if the process may sometimes seem numb. As we may have learned from financial theory, the value of a stock is not based on history, but on the value of future cash flows discounted to the present.
According to current information, the law of supply and demand prevails in the stock market. In practice, this means that the value of a share is determined by the price at which investors are willing to sell and buy it. It is not possible to identify the emotional states behind the decisions of buyers and sellers, so the information that is hidden in the shares is almost impossible to guess completely correctly. It can even be said that the stock market operates largely on the predictions that buyers and sellers make of the future prospects of companies that day. Because forecasting is notoriously challenging, expectations for the future are constantly changing.
Analyzing the company’s history is like dancing on a string. It is not worth staring aggressively only at the past, but at the same time, you should not bet everything based on guesses about the future either. If investors kept the past and the future in balance when making their analyses, the world would be full of millionaires. Theory and “gut feeling” are tools, not absolute truths.
Tips and general suggestions about topics discussed
Podcasts (available in Spotify and Apple Podcasts)
The Tim Ferriss Show
Making Sense with Sam Harris
The Tony Robbins Podcast
Books:
The Euro, Joseph Stiglitz
Principles, Ray Dalio