When you look at any living organism, whether that be a plant, an animal, or a human being, you can usually make a general assumption regarding the overall health of that organism by its outwardly appearance.
The exact same principles apply when looking at a stock’s chart.
All past fundamental data, and forward-looking assumptions, are translated into buy and sell orders. That inflow and outflow of money make up a stock’s chart. And just as the eyes and personality of a person tell a story, so does the historical price action of a stock’s chart.
Let’s play a little game. Without knowing what company the chart below belonged to, would you assume it was a poorly run company losing money, or a well run company grabbing market share at every turn?
You would assume that the stock’s chart would reflect the health of the company, yes? Well it does. That chart above is amazon.com. One of the best performing companies, if not thee best performing company of the last decade. Here is the chart again with the ticker AMZN posted in the top left.
When a chart trends like this over time it means that more people are buying the stock than selling it. There is an imbalance of supply and demand in the shares outstanding. As a company continues to perform well year after year, the stock continues to rise. That doesn’t mean there wont be 30%-50% draw downs, but in the long run these types of trends are likely to persist.
Let’s lake a look at some more exceptional companies, and how their charts reflect their fundamentals .
Starting to see a pattern? I challenge you to find me an exceptional company over the last 50 years that did not have a similar looking chart while the company was executing. The best companies will continue to trend and create value for their shareholders for decades and decades. Unfortunately, some only have a hot streak for a few years before they fizzle out. Capitalism is built on ruthless competition.
Now, let’s take a look at some companies you would not want anywhere near your portfolio. You will notice there is no defined trend, or worse, a down trend. Again, just by looking at the chart, and doing zero fundamental research, financial modeling, or speaking with management, you would know to stay away from these companies. You might not know the exact reason just by looking at the chart, but you know there is a reason why this company is not doing well. You only want 10-20 stocks in your portfolio, so why own anything but the very best?
Walgreens. No defined trend between 2016-2018. Failed break out at $80, followed by a collapse to $35.
IBM. No defined trend = no ROI.
Sears. Showing that trends persist going up, and down. Avoid charts like this at all cost.
Macy’s. No defined trend followed by a collapse from Covid-19 with no recovery.
There is a sports saying that goes “Offense wins games, defense wins championships.” The exact same is true regarding investing. If anything, defense matters more because if you lose the championship in investing, you can’t come back next year and try again. This intellectual endeavor is about longevity. Buying stocks in a healthy up trend will not only put you in the strongest companies, it will keep you out of the weak ones. I can’t stress enough how important it is to minimize losses. Opportunity cost is real, and when a position you have is under-performing, or losing you money, that same capital could be at work in a company generating a high ROI (return on investment). Paying close attention to the long term trend of a stock will maximize your odds of being in winners, and out of losers.
All charts courtesy of stockcharts.com
This blog is based on my own personal opinions and views, and should not be taken as professional investment advice. Market speculation is very risky, and you should do your own research before deploying capital. Any action you take upon the information provided on this website is strictly at your own risk.