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In a 7 year time frame from January 3, 2006 to December 31, 2012, Decker Corporation [stckqut]DECK[/stckqut] increased 304.7% if you would have implemented a pure buy-and-hold strategy. If you would implemented the strategy that I explain in my book, The Confident Investor, you would have seen a 371.2% return on your investment. This is a 21.8% increase on the profit percentage.

To put it into actual dollars, suppose you invested $10,000 in DECK on 1/3/2006. With the system that is explained in The Confident Investor, you would have exited the market on 12/31/2012 with $60,341.48. With my system, it is not uncommon for you to need a bit more cash available to cover the ongoing trades. Therefore, rather than $10,000, you would have needed $12,806.98 and your actual return would have been 371.2%. You would have 1,288 shares which were purchased with other people’s money and still have your original $10,000.

To be fair in our comparison, the buy-and-hold method if calculated with $12,763.85 would have ended up with $51,826.71 and a respectable 304.7%. You would have purchased 442 shares which had split 3:1 to 1326 shares but your original $12,806.98 would be tied up in the stock.

The profit on the buy-and-hold strategy in this scenario is $39,019.74.  The profit using GOPM (Grow on Other People’s Money) is $47,534.51.  That means the increased profit on DECK in this time frame was $8,514.77. This means your profit INCREASED by 21.8%!!

Understanding buy-and-hold is easy. You have a given amount of money, in this case $12,806.98. You buy 442 shares at the start of the test period. At the end of the test period, you sell the shares and the profit (or loss) is the standard that any other system must beat. In the case of DECK, the stock split 3:1 in the time period.

Understanding GOPM is a bit more complicated without reading my book, The Confident Investor. Before you even start to invest, the system teaches you to look for incredibly well-run companies and only invest in those companies. While DECK may or may not have qualified for this status in 2006, it does in 2013 so we are simply back-testing against a currently well-run company. While past performance doesn’t guarantee future performance, it is probably the best tool that we have to understand investment methodologies.

After you find a well-run company, you are going to buy $10,000 worth of shares when the technical indicators tell you that the stock has upward momentum. You are then going to sell those shares when that momentum slows down or reverses.  The profit that you make on that transaction, you will keep in the stock (in other words, you are not going to sell those shares). You are going to keep the $10,000 ready for when the stock has the correct momentum. If there is any excess profit (e.g. less than the value of a full share after keeping the $10,000) you will just stick that into your money-market account in this example. It is possible that you could invest this excess amount but we are going to simplify this example and just hold that money.

As a quick example, you invest $10,000 in a stock trading at $50 per share so you have purchased 200 shares.  Over the course of the next several days or weeks, the stock price increases to $55 which is where you decide to sell. To get your original capital of $10,000 back, you sell 182 shares resulting in $10,010 in your account and 18 shares that are essentially free since they were purchased with Other People’s Money. You now have your original capital of $10,000, 18 free shares and an additional $10.

Using this technique, you will make several trades per year and may even be trading weekly. Therefore, to make this model fair, I need to account for stockbroker fees and commissions.  In this example, I am using $8 for every sell and for every purchase. You may have a better fee from your favorite broker but $8 seems fair for a test. Frankly, if you are paying more than $10 for each transaction then you probably need to be looking at another broker!

Using this technique, by the end of the test on 12/31/2012 you would have 1,288 shares of DECK that cost you $2,806.98. Those 1,288 shares were acquired for $2.179 per share! This is significantly cheaper than today’s stock price and no matter what happens to DECK you could probably sell these shares for a profit at any time! You would still have the original $10,000 in your bank account! This is because you have purchased these share with Other People’s Money.  This is why I call my system GOPM – Grow on Other People’s Money.

The rest of this article shows each buy and sell transaction for those 7 years. It shows the date, the assumed purchase price on that day (taken from Yahoo – the purchase price is the average of the opening and closing price on that day) and the profit or loss. If you haven’t read my book, The Confident Investor, then you may not understand the timing of the trades. In fact, if you haven’t purchased the book and registered here on this site as a book owner then you won’t be able to see those individual trades. If you have registered and cannot see the trades, make sure you are logged in and refresh your browser.

Which brings me to the big set of questions. Shouldn’t you own this book? Does your investment strategy beat buy-and-hold? Do you even have an investment strategy? If your strategy beats buy-and-hold, does it beat GOPM – Growing on Other People’s Money?

You can purchase my book wherever books are sold such as Amazon, Barnes and Noble, and Books A Million. It is available in ebook formats for Nook, Kindle, and iPad. It may be available at your favorite bookstore as well but you may have to ask.

DECK 2006-12

Additional commentary not originally published with this article.
When this article was originally published, the following paragraphs were not included.

At the time that I wrote the article, I hadn’t discussed portfolio management on my site to any great detail. Recently, I discussed the concept of doubling your investment to the point that the free stock is equal to one allotment of your portfolio. Now that this concept has been explained, I need to add another metric to the Deckers analysis.

If you would have invested in Deckers as described in this article, you would have doubled your investment by March 2, 2007. By that date, you would have acquired 150 shares of DECK which were valued at about $67.45 for a total profit of $10,101.75. This means your $10,000 initial investment would have doubled.

This event would have occurred 292 trading days after you initiated trading on DECK. If you followed my advice on portfolio management, you would stop trading in DECK at this point and focus on other stocks to build up equity in them.

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Description of DECK trades table
While it may be obvious the meaning of the various columns, some of them definitely need a bit of explanation if you have never walked through a trading analysis with me.
Date – The date of the trade. It is important to note the long delays between trades. This will help you with your portfolio since you do not have to dedicate your average trade purchase (in this case $10,000) to just one stock but rather you can invest that money in the hottest stock at the time.
Buy/Sell – This is probably pretty obvious. On this date, did the system buy or sell DECK? The SELL will only sell from the previous transaction’s BUY.
Purch. Price – The selling or buying price of this transaction. This is taken from Yahoo’s Historical Pricing page and it is the average of the opening and closing price on that day.
Share – The number of shares that $10,000 will buy on that day.
Invest – The amount that was actually purchased. This is the number of shares (the previous column) multiplied by the Purch. Price column.
Returned – When you sell the shares from the previous BUY, the amount of money that results.
Profit/Loss – How much was profited from the previous BUY.
Free shares – If the SELL was profitable, how many shares was evenly divides into this profit.  These are free shares as they were purchased with Other People’s Money.
Excess – After the Free Shares are taken out, how much money is left over. If the transaction was not profitable, then what was the loss.
Running investment balance – A running total of the value of the investment.

DECK trades table
Date Action Purchase Price Shares Invested Returned Profit / Loss Free shares Excess Running investment balance
1/5/2006 BUY $29.83 335 $9,991.38 $0.00
1/19/2006 SELL $31.09 $10,405.48 $414.10 13 $10.00 $404.11
2/1/2006 BUY $32.62 306 $9,981.72 $424.06
2/7/2006 SELL $31.88 $9,747.28 ($234.44) ($234.44) $414.44
2/22/2006 BUY $32.38 308 $9,973.04 $420.94
3/7/2006 SELL $35.33 $10,873.64 $900.60 25 $17.35 $1,342.54
3/20/2006 BUY $36.86 271 $9,989.06 $1,400.68
4/11/2006 SELL $40.51 $10,968.86 $979.80 24 $7.68 $2,511.31
4/25/2006 BUY $42.51 235 $9,989.85 $2,635.62
5/8/2006 SELL $43.10 $10,119.33 $129.47 3 $0.19 $2,801.18
6/30/2006 BUY $38.28 261 $9,991.08 $2,488.20
7/7/2006 SELL $37.43 $9,761.23 ($229.85) ($229.85) $2,432.95
7/25/2006 BUY $38.06 262 $9,971.72 $2,473.90
8/10/2006 SELL $43.00 $11,256.69 $1,284.97 29 $38.11 $4,041.53
9/8/2006 BUY $42.67 234 $9,983.61 $4,010.51
10/17/2006 SELL $49.56 $11,587.87 $1,604.26 32 $18.50 $6,243.93
11/8/2006 BUY $52.99 188 $9,961.18 $6,676.11
11/24/2006 SELL $54.42 $10,222.02 $260.84 4 $43.18 $7,073.95
12/1/2006 BUY $56.12 178 $9,988.47 $7,294.95
1/4/2007 SELL $58.73 $10,445.05 $456.58 7 $45.50 $8,045.33
2/1/2007 BUY $58.56 170 $9,954.35 $8,022.04
2/23/2007 SELL $63.86 $10,848.20 $893.85 13 $63.67 $9,579.00
3/1/2007 BUY $66.00 151 $9,965.25 $9,899.25
3/27/2007 SELL $72.11 $10,879.86 $914.61 12 $49.35 $11,681.01
4/16/2007 BUY $72.25 138 $9,970.50 $11,704.50
4/24/2007 SELL $73.13 $10,083.25 $112.75 1 $39.63 $11,919.38
4/27/2007 BUY $73.99 135 $9,988.65 $12,060.37
7/11/2007 SELL $101.62 $13,710.03 $3,721.38 36 $63.23 $20,221.39
7/23/2007 BUY $105.68 94 $9,933.92 $21,030.32
7/24/2007 SELL $103.72 $9,741.21 ($192.71) ($192.71) $20,639.29
9/18/2007 BUY $100.87 99 $9,986.13 $20,073.13
10/11/2007 SELL $112.21 $11,100.30 $1,114.17 9 $104.32 $23,338.64
10/22/2007 BUY $112.82 88 $9,928.16 $23,466.56
11/9/2007 SELL $127.50 $11,212.00 $1,283.84 10 $8.84 $27,795.00
11/26/2007 BUY $133.21 75 $9,990.38 $29,038.69
12/31/2007 SELL $157.08 $11,773.00 $1,782.63 11 $54.75 $35,971.32
4/2/2008 BUY $112.68 88 $9,915.84 $25,803.72
4/9/2008 SELL $112.31 $9,875.28 ($40.56) ($40.56) $25,718.99
4/17/2008 BUY $117.26 85 $9,966.68 $26,851.40
4/23/2008 SELL $117.00 $9,936.58 ($30.10) ($30.10) $26,791.86
4/25/2008 BUY $138.85 71 $9,858.00 $31,795.51
5/7/2008 SELL $139.95 $9,928.10 $70.10 0 $70.10 $32,047.41
6/20/2008 BUY $137.21 72 $9,879.12 $31,421.09
7/2/2008 SELL $135.41 $9,741.52 ($137.60) ($137.60) $31,008.89
12/16/2008 BUY $65.36 152 $9,934.72 $14,967.44
1/7/2009 SELL $79.07 $12,010.64 $2,075.92 26 $20.10 $20,162.85
3/24/2009 BUY $49.73 200 $9,946.00 $12,681.15
4/15/2009 SELL $60.73 $12,137.00 $2,191.00 36 $4.90 $17,670.98
6/1/2009 BUY $60.25 165 $9,940.43 $17,531.30
7/2/2009 SELL $69.44 $11,449.60 $1,509.18 21 $50.94 $21,665.28
7/15/2009 BUY $68.89 145 $9,988.33 $21,492.12
7/24/2009 SELL $68.16 $9,874.48 ($113.85) ($113.85) $21,264.36
8/12/2009 BUY $69.37 144 $9,988.56 $21,641.88
8/17/2009 SELL $68.74 $9,890.56 ($98.00) ($98.00) $21,446.88
9/14/2009 BUY $70.91 140 $9,926.70 $22,122.36
10/1/2009 SELL $83.11 $11,626.70 $1,700.00 20 $37.90 $27,590.86
10/14/2009 BUY $87.56 114 $9,981.27 $29,068.26
10/28/2009 SELL $93.40 $10,639.03 $657.76 7 $4.00 $31,660.91
11/9/2009 BUY $95.66 104 $9,948.12 $32,427.05
11/19/2009 SELL $96.75 $10,053.48 $105.36 1 $8.61 $32,893.30
12/4/2009 BUY $97.92 102 $9,987.84 $33,292.80
12/15/2009 SELL $97.52 $9,939.04 ($48.80) ($48.80) $33,156.80
12/28/2009 BUY $98.13 101 $9,911.13 $33,364.20
1/20/2010 SELL $107.73 $10,872.23 $961.09 8 $99.29 $37,488.30
2/24/2010 BUY $101.89 98 $9,985.22 $35,457.72
4/12/2010 SELL $136.41 $13,360.18 $3,374.96 24 $101.12 $50,744.52
4/22/2010 BUY $139.83 71 $9,927.93 $52,016.76
4/30/2010 SELL $145.59 $10,328.54 $400.61 2 $109.44 $54,448.79
6/1/2010 BUY $142.70 70 $9,988.65 $53,367.93
6/22/2010 SELL $158.74 $11,103.45 $1,114.80 7 $3.66 $60,478.04
7/27/2010 BUY $50.94 196 $9,983.26 $58,218.71
8/6/2010 SELL $49.29 $9,652.84 ($330.42) ($330.42) $56,338.47
9/17/2010 BUY $47.64 209 $9,955.72 $54,446.81
9/22/2010 SELL $47.19 $9,853.67 ($102.05) ($102.05) $53,932.46
9/24/2010 BUY $47.39 210 $9,951.90 $54,166.77
10/7/2010 SELL $50.21 $10,535.05 $583.15 11 $30.89 $57,936.57
10/12/2010 BUY $51.35 194 $9,960.93 $59,252.13
10/19/2010 SELL $52.56 $10,187.67 $226.74 4 $16.52 $60,858.69
10/26/2010 BUY $54.55 183 $9,982.65 $63,168.90
12/28/2010 SELL $84.22 $15,403.35 $5,420.70 64 $30.94 $102,910.73
2/7/2011 BUY $82.82 120 $9,938.40 $101,206.04
3/1/2011 SELL $86.25 $10,342.00 $403.60 4 $58.60 $105,742.50
3/30/2011 BUY $86.53 115 $9,950.95 $106,085.78
4/12/2011 SELL $87.74 $10,081.53 $130.57 1 $42.84 $107,650.85
4/18/2011 BUY $92.28 108 $9,966.24 $113,227.56
4/29/2011 SELL $86.03 $9,282.70 ($683.54) ($683.54) $105,552.68
5/26/2011 BUY $90.18 110 $9,919.25 $110,644.73
6/1/2011 SELL $89.86 $9,876.60 ($42.65) ($42.65) $110,258.22
6/30/2011 BUY $87.82 113 $9,923.66 $107,755.14
7/27/2011 SELL $93.59 $10,567.67 $644.01 6 $82.47 $115,396.47
8/1/2011 BUY $101.26 98 $9,923.48 $124,853.58
8/4/2011 SELL $98.03 $9,598.94 ($324.54) ($324.54) $120,870.99
9/8/2011 BUY $90.67 110 $9,973.70 $111,796.11
9/22/2011 SELL $95.05 $10,447.50 $473.80 4 $93.60 $117,576.85
10/7/2011 BUY $100.48 99 $9,947.03 $124,287.58
10/18/2011 SELL $101.96 $10,086.04 $139.02 1 $37.06 $126,226.48
10/28/2011 BUY $114.22 87 $9,936.71 $141,398.17
11/9/2011 SELL $108.14 $9,399.75 ($536.96) ($536.96) $133,871.13
2/8/2012 BUY $86.43 115 $9,939.45 $107,000.34
2/10/2012 SELL $84.40 $9,698.00 ($241.45) ($241.45) $104,487.20
2/16/2012 BUY $87.53 114 $9,977.85 $108,355.95
2/24/2012 SELL $79.33 $9,035.62 ($942.23) ($942.23) $98,210.54
8/15/2012 BUY $45.48 219 $9,960.12 $56,304.24
9/4/2012 SELL $49.04 $10,731.76 $771.64 15 $36.04 $61,447.12
11/27/2012 BUY $35.69 280 $9,991.80 $44,713.31
12/10/2012 SELL $40.90 $11,442.60 $1,450.80 35 $19.47 $52,672.76
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I believe the most important part of my system is the identification of great companies. If your bank account was sufficiently large, you could simply buy stock in these great companies and sit on it. This may not maximize your investment but it would be the least amount of work. All you would have to do is monitor the continued success of the individual companies and re-balance occasionally.

The reality is that few of us are so wealthy that we can buy a sufficient quantity of 20-30 stocks to just sit on. This is why so many people invest in mutual funds that eventually under-perform the market. To offset this lack of funds, my system allows you to move your money between companies on your watch list and hold only those companies that are currently experiencing a bull market and avoid those that are moving sideways or downward. I call this system, GOPM (Growing on Other People’s Money). It works quite well at growing your stock portfolio in those companies that are on your watch list.

The heart of GOPM trading management is technical analysis or at least chart analysis. While I do not suggest that you are a pure technical trader, I think there are extremely good signals that you can follow that help you avoid the downturn in the market. I am not going to get into specifics on my favorite indicators, but here are some common sense nuggets that should be used with my favorite indicators as well as all others.

  1. After a long positive run, don’t jump back in 3-5 days later. If the stock is bouncing back and forth between sell and buy signals then you should interpret that as being a hold or wait.
  2. Avoid buying or selling when much of the finance industry is taking a long vacation. The most obvious periods where you should be hesitant to believe the charts and the technical signals are July 4, Christmas, and Thanksgiving. Just assume that the most senior traders are spending time with their families and the folks running the office are young enough that they can remember their first legal beer purchase.
  3. Don’t sell the day after you bought unless the stock just took a hit and there was a news event. This is a corrollary to number 1 above. Just because a technical indicator reversed on you doesn’t mean you should do a knee jerk reaction.
  4. Weird stuff happens during earnings announcements. Sometimes it works for you and sometimes it is against you. I know traders that purposefully sell their shares a week before earnings announcements just to avoid the crowd mentality of everyone going over the cliff like a lemming. I don’t necessarily subscribe to this waiting period but if I have had a good run with a stock, I may sit out for a week or two around earnings time.
  5. Be wary of false buy signals that appear in a sideways channel. It is important to learn how to recognize a sideways channel. Many technical indicators can give bad signals in a sideways channel so be suspicious of any buy or sell signal.
  6. If a company has been trending up or down for a while, don’t panic buy or sell when they have a momentary blip and the trend seems to be reversing. Wait a few days to see what is really happening. Companies usually continue to trend until they find a ceiling or floor. That limit is usually tested a few times before it is firm. The first apparent reversal of a trend is typically not a reversal and, at best, the first testing of a limit. Trading while the limit is being established only ties up your cash at best and possibly is money losing if the limit doesn’t hold.

Some thoughts for readers of my book, The Confident Investor.
For many of you reading this, this article will end here. However, if you are a registered owner of my book, The Confident Investor, I am sharing some further guidance that is uniquely beneficial to those readers. You can purchase my book wherever books are sold such as Amazon, Barnes and Noble, and Books A Million. It is available in ebook formats for Nook, Kindle, and iPad. It is free to register for any owner of my book. [s2If current_user_can(s2member_level1)]

  • RSI is a soft indicator and not a must sell or don’t buy indicator. In my book I tell you to watch 70 on the RSI scale and not buy a stock if it has gone above 70. In reality, 70 is not a hard number and you dont want to overreact to cycling above and below 70 on RSI. There are times when a stock will go up to 71, drop to 69, then back up to 70.5 and then back down again. This is not the situation that you are trying to avoid. You simply want to avoid a stock going well above 70 (perhaps 72 and higher) and then staying there for a a couple days.
  • MACD tends to be cyclical. It is often possible for you to assume that the MACD will go positive or negative soon. It is perfectly fine to get a jump on the market and buy or sell as the MACD starts to approach zero. This may slightly increase your profitability.
  • One of the easiest ways to see a channel situation is by looking at the 5, 10, and 20-day EMA. If the gap between 5 and 10 is about the same as the gap between 10 and 20 then you need to be concerned that it is a sidways channel. This is even more true if the gaps have been roughly the same for a couple days or so. As I mention above, you need to be cautious about trading in a sideways channel.
  • Be wary of down markets. Before you check to see your individual stocks, run the 3 main indicators of my book on the S&P 500 and the Dow Jones Industrial Average. These indicators (5,10,20 EMA, MACD, and RSI) will tell you if the market as a whole is dropping or growing. You may want to take this into account when you look at your individual stocks. There are times when the entire market is down that you may want to hold on for another day or two before selling your individual stock even though it’s indicators showed sell. Sometimes, when the market rebounds, your stock will rebound as well and you can stay in the stock for a longer period and make more money.[/s2If]

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I frequently get questioned about how to account for stock buy backs and dividends when analyzing a company. I am going to save dividends for another article and just concentrate on stock buy backs. I will start this discussion with a great quote from Dr. William Lazonick of University of Massachusetts:

“Here we have all these companies obsessed, basically with keeping their stock prices up, and saying the best thing that they can do with their money is spend billions of dollars on stock. And my view of that is, any company that says that they have nothing to better do with their money, the CEO should be fired.”

While many will say that this is an extremely strong statement, I believe that Dr Lazonick is not that far off from the truth.

There are many ways that companies can use their cash that helps the long-term success of the company. Among these are:

  • R&D for new products – This helps the company have a competitive advantage in its market in the future.
  • Increased pay and benefits for employees – While we don’t want our companies to give foolish salaries we do need them to have happy employees that are loyal to the company’s success. In nearly every company – turnover is expensive.
  • Invest in the infrastructure of making their products – Apple [stckqut]AAPL[/stckqut] has made a science of this technique. It regularly helps its suppliers with acquiring the manufacturing tools required to produce great products.  Apple also will commit to large orders and effectively buy up the supply of emerging technology.
  • Acquire new products and technology through mergers and acquisitions – Effectively, the more cash on hand a company has, the more flexibility the company has in doing deals that can dramatically accelerate new products and new markets.

If we re-examine Dr. Lazonick’s quote, it now begins to make sense. A stock buy back plan basically means the company has run out of ways to effectively invest in the long-term prospects of the company. Rather, it is trying to shore up its stock price in the short term. Is this in the best interest of its shareholders or just the stock options of the executive committee?

Many times this shoring up doesn’t even work that well.  According to Fortuna Advisors: “…research shows high return companies create the most value for shareholders when they deploy more capital in growing their operations rather than giving it back to shareholders.”

Recently, the Wall Street Journal pointed out that many times the buy back programs don’t even change the amount of stock outstanding. It seems that it is not uncommon that the buy back is offset by stock grants to favored employees.

I hope that you listen to the quarterly comments of the CEO of each of your holdings. When you are listening to those comments and he or she discusses stock buybacks as a way to boost value to the shareholder, you should be actually hearing, “We have a lot of money burning a hole in our pocket and we are not smart enough to profitably use it, so we are doing a stock buy back!” Or, maybe the CEO is saying, “I dare you to fire me based on the advice of Dr. Lazonick!”

The goal of my book, The Confident Investor, and this site, is to help you find great companies and then grow your investment in those companies by using other people’s money (GOPM). I don’t pay attention to the buy back announcements of companies. I assume they are doing the buy back simply because it is the popular thing to do. I refuse to reward them for this activity but I am pragmatic enough to not penalize them.

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This happens to me frequently and it likely happens to you. All of my friends know that I manage my own investing and so they are constantly giving me tips. They tell me about the latest hot company or the industry that is going to explode soon.

It happens almost any time that friends gather together. I see them at a card party, watching the big game at the local sports bar, or the wedding reception of a friend’s child. The conversation invariably turns to investing because they know my passion for the subject. They decide to give me the latest “hot tip” on a stock.

I rarely take the word for it. In fact, I never take the word for it. I will put the stock through my filters that I describe in my book, The Confident Investor. I judge them by the following criteria:

  1. The growth of the company’s sales.
  2. The growth of the company’s earnings per share of stock outstanding.
  3. The growth of the company’s market value compared to its earnings.
  4. The growth of the company’s earnings before taking into account interest and taxes.
  5. The value of the company compared to its earnings as compared to other similar companies.
  6. The productivity of the company employees relative to industry averages.

If the company survives that gauntlet, I start tracking the stock with my technical analysis tools to find a good time to invest. I want to buy the stock when it looks like the price is increasing rather than when the price is falling. This allows me to Grow on Other People’s Money (GOPM). I will also put the stock on my Watch List for others to learn about this new company.

Right now there are about 50 stocks on my Watch List. If you need to find another stock as an investment, I suggest this list. The list covers a huge cross-section of companies from retail to manufacturing to services to communication to computers to finance.

Be polite to your friend turned stock analyst but don’t just jump into the stock. If you want to learn how to evaluate that “hot tip” then you can buy my book, The Confident Investor, wherever books are sold such as Amazon and Barnes & Noble. It is available in paperback and ebook formats such as for the Kindle, Nook, or iPad.

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Most financial articles, financial writers, and stock theorists will include some type of phrase that past performance does not equate to future performance. Basically, just because we did well or the stock did well (or poorly) in the past that doesn’t mean that the same will be true in the future.

This is great advice even if it is hogwash. It reminds me of noise that was written by lawyers. Yes, I have similar phrasing on my site and in my book. Let’s be truly honest though – the past is the best way for us to predict the future. In a few weeks, I will be publishing some historic back testing of my investing strategy and I have already published an example of IBM. There is simply no better way to understand how a strategy worked in the past as to how it will do in the future. It won’t guarantee success but what test is more reliable?

Let’s talk about a few examples that you probably can relate to that have nothing to do with stocks.

If you are hiring a new person at your company then you will inquire about that person’s past. There are many questions that you will ask to ascertain if that person has the traits to be successful in the future. Most of those questions are about what the person did in the past that would give you some inkling as to what they will do in the future at your company. You might ask, “How did they handle this type of situation?” or “Give an example when this happened.” These are valid interview questions that provide some idea of past performance and how it would result in future performance.

In the US, we just finished a Presidential election. While US politics is pretty ugly and vicious, part of the conversation was what the candidates did in the past which gives some voters some idea of what they will do in the future. Some voters don’t use this information to make an informed decision but some will use it. It is valid to say that a candidate supported a certain law or effort which means they are likely to act a certain way on a certain type of legislation.

If a stock is trading in a range between $7 and $10, you would not expect it to go to $20 in the next 90 days without some instigator to change its behavior. Similarly, if a stock has been growing at 20% per year, you would not expect it to drop 50% in the next 4 weeks unless there was a particularly bad piece of news affecting the company’s health.

Any good analysis of a stock needs to have some historical perspective, For this site (and my book) I look at 10 years worth of data. I weight the most recent years more heavily than years 8, 9 and 10. Sometimes that means that I ignore the hot company that went public last month but that is okay. I want to be confident that the company I invest in has a track record of success. I look for good past performance because anything else is just a guess. I don’t guess with my money and I don’t think you should guess with yours.