Predictions Based on Past Market Performance Are a Waste of Time

Should you really care that the Dow rose 26% in 2013?

Jan 12, 2014 at 7:00PM

Now that 2013 is in the books, investors have been flooded with market predictions for 2014. My colleague Dan Caplinger recently noted how wrong the market pundits have been in the past, as he pointed out, among other things, why the motives fueling predictions can interfere with the predictions themselves. Yet a lot of pundits are using a particular set of stats to predict another winning 12 months in the market.

Their argument hinges on the S&P 500's (SNPINDEX:^GSPC) 29.6% gain in 2013. Since 1950, the S&P has risen more than 25% 12 times, and if you average out all the years since 1950, the index has risen 9% annually. However, in the years following those 25% gains, the market has averaged an 11% gain the following year. Furthermore, the market has finished in the black 83% of the time following those years of 25% gains, while averaging across every year since 1950, the market has risen only 73% of the time the next year.  

Sure, those are some impressive numbers. But as financial advisors and prospectuses constantly remind us, past performance is not indicative of future results. Besides, it's not as if the S&P was the only big gainer last year. The Dow Jones Industrial Average (DJINDICES:^DJI) increased by 26.5%, and the Nasdaq rose an amazing 38.32%. 

But why does it matter what the overall markets do anyway? If you're picking individual stocks believing that you can beat the market, then focusing on what those companies are doing and will do is the only thing that should matter -- not how the S&P 500 or the Dow will do in 2014. 

Most investors believe that the market is a forward-looking entity, and that's why stocks are priced based on what a company is expected to do in the future. So whether you're making your own predictions or listening to someones else's, make sure they're based on what an individual stock is poised to do in the coming year, not what it's done in the past or how the major indexes performed. Focus on things like expected future cash flows, profit forecasts from management, planned product launches, and other revenue drivers, and base your buy and sell decisions on those factors -- not what the company has done for you lately, and not what it did last year.

People like to use whatever data points they can find to feel more legitimate about their investing choices, despite the fact that they're often violating some basic rules of stock investing. The bottom line: Any investing prediction based on past events is a waste of your time. Look forward, not back.

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Fool contributor Matt Thalman has no position in any stocks mentioned. Check back Monday through Friday as Matt explains what causing the big market movers of the day, and every Saturday for a weekly recap. Follow Matt on Twitter: @mthalman5513

The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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