Informed share investing decisions

Informed share investing decisions
Written November 24

Whenever I receive a recommendation about a share (or indeed anything associated with the stockmarket) there is almost always a tag line that goes something like this:

Past performance does not guarantee future performance.

Undoubtedly this is a correct statement, for indeed as time goes on, things change. The world and everything in it, (including the sharemarket) is in a constant state of flux. In the natural world climate change is having a huge impact on all creatures including us. In the world of human existence, people are born and people die, new ideas spring up, new technology builds on scientific advances and this flows on to affect our lives. When I grew up in Sydney there were no TV’s, no portable phones, no microwave cookers, no drones, no supersonic planes, no AI, let alone any air cookers or home coffee machines. The pace of science and technology shows no sign of slowing down and is ever increasing at a mushrooming rate as new ideas build on old.
All these developments have had a profound impact on the sharemarket as companies using old ideas and old technology go to the wall and new one’s spring up to replace them. Companies that fail to adapt to the changes and embrace the new technology are left behind and eventually demise.

So it’s true that past performance is no guarantee of future performance.

But:
There’s also a saying that goes like this:

History has a habit of repeating itself and what has occurred in the past will usually recur in the future.

For example there have been terrible wars in the past that have caused huge destruction and killed millions of people and you might well ask ‘what for?’ ‘what did these wars prove?’ For example Germany decisively lost WW2, but within a short period of time, shrugged off the loss and is now a booming economy. So what was the point of all that destruction and the loss of millions of lives on both sides?
I recall the song ‘Where have all the flowers gone’, where the tag line to each verse is:
‘When will they ever learn?’

Have nations learnt the lessons from the past and stopped engaging in fruitless warfare? In fact the opposite applies and as I write there are two major wars going on in the world. Recent statistics indicate that most developed economies (including Australia) are spending more and more on defense – which is a euphemistic way of saying they are really spending more on weapons designed to attack.

The fact is that essential human nature hasn’t changed much (if at all), and we are basically driven by the same need for pleasure seeking, pain avoiding and the prolonging of our lives, which has always been the case.

So on the one hand there is the fact that the future is unpredictable, and on the other hand there is the fact that human actions are still based on the same instincts as they were millions of years ago and therefore what humans have done in the past they are likely to do again in the future.

What does all this mean for share investors like you and I?

If we believe the future is basically unpredictable, should we simply close our eyes and use the ‘dart approach’ when making an investment decision? Or if we believe human nature is basically the same as it has ever been, should we look to the past and use it as a guide to the future?

The answer, I believe is that WE HAVE NO CHOICE.

Unless you have a polished crystal ball you can’t look into the future and you can only speculate on what might occur. On the other hand you can look to the past and use it as a guide. And as I said, you really have no choice. Although the past isn’t always a reliable guide to the future we have to use it if we want to make informed investment decisions.

And it’s a fact that despite some ups and downs along the way, for many decades the Australian sharemarket has always trended upward. Therefore if you invest in companies with a sound history of making profits and you have a diversified portfolio, in the long term your investment will be profitable.

That’s why I’m basically a long term investor and I have accumulated a wide variety of of sound shares in my portfolio. And you know what? My portfolio tracks the XAO (All Ordinaries Index) very closely and often beats it because most of my shares pay good dividends (usually franked) and I reinvest the divvies (usually using a drp). In other words my portfolio keeps pace with the overall performance of our market as a whole.

Unfortunately I couldn’t resist the temptation to try to make a fast buck and I have a small proportion of my portfolio value in low market cap ‘speccies’. I say ‘unfortunately’ because almost without exception they are losers. But I had the sense to limit my investment in them to only a small proportion of my total investment capital so the impact on my total portfolio has been minimal.

The bottom line is:
Even though the past isn’t necessarily an accurate guide to the future, it’s the best we have. If you investigate company financial fundamentals going back some years and choose those with a sound track record of profitability and you don’t put all your eggs in one basket but have a diversified portfolio, your investment in shares is highly likely to be very profitable.