Historical Stock Returns: Are They Valuable
Almost all of us have heard the stories of how much money could have been made by investing in a certain stock 10, 20, or even 30 years ago. Walmart (WMT), Microsoft (MSFT), Amgen (AMGN), and Altria (MO) are all great examples of stocks that have made their shareholders a lot of money over the past several decades. Well, if you are like most people, you are thinking, "That's great, I wish I would have invested in those stocks back then, but how does this help me now?" The answer depends on how you perceive and think about the information.
One way to respond is with the glass is half empty attitude, "I can't believe how unlucky I am, I always miss out on the big winners." If you truly believe that, you are not unlucky, but rather creating a self-fulfilling prophecy through negative thinking. The fact is, you probably did miss the boat on the previous mentioned stocks, but new opportunities always exist, finding them is the tricky part.
Which brings me to the other way to respond to the missed opportunity: Evaluate the history of the missed stock opportunity and discover ways to use that information to create a new opportunity. Every stock has a history, and while it can't predict the future, historical stock prices and returns can be used as another tool to increase the odds of finding a good trade. For example, let's look at two stocks: The first stock has earned better than 10% in 12 of the last 15 years while the other stock has earned over 20% in 8 of the last 15 years, but lost over 10% in 5 of the other years. Which stock do you think is more likely to earn over 10% the next few years? While you may earn a higher return with the second stock, the likelihood of loss is also much greater. Investments with a higher potential return also have a higher potential loss. It is called the risk/reward tradeoff. Also, keep in mind, when dealing with individual stocks, volatility and risk of loss is much higher than when dealing with a well diversified portfolio.
So the next time you learn about the great stock you missed out on, see what you can learn from its history and find another great stock to invest in on your own. Not only can it be rewarding financially, but it can be even more rewarding personally.