Does History Repeat Itself?

The reason we carry out technical analysis in the first place is because of the idea that history repeats itself – or at least serves as a foundation for future occurrences.

The relationship between history of stocks and their future performance is the same as the one between our pasts as humans and our current lives or our future. We have a lot of memories of past events and these memories are not nearly 10% of what happened to us.

However, these few memories detail specific events that are important and have a degree of significance in our lives. Many of these events of the past can be linked to patterns, characteristics, personality traits, desires, and a lot of other things that define who we are and who we ought to be.

This is pretty much the same way with stocks. The reason we carry out technical analysis in the first place is because of the idea that history repeats itself – or at least serves as a foundation for future occurrences. This is why we carry out valuations or ratio analysis based on past records or financials.

Much of this is not incorrect because the stocks are not independent of their past. However, just like only a small percentage of our past actually influences our future, only certain key elements of a company’s past financials can give credence to its current state let alone predict the future accurately.

The Basis

At the very basis of history repeating itself is fact or truth. What this means is that some things would always be as true as day and would never change even in the future. For example, an individual who was born a female would most likely remain a female even in the future. As such, past events that are rooted in this fact would still remain relevant.

In the stock market, it is also the general belief that human nature as well as investor psychology does not change. The fact that the stock market is also governed by the laws of demand and supply wouldn’t change.

At extreme levels, an individual can also either be too fearful to make logical decisions or simply too greedy to do same. These attributes serve as the basis of the stock market and can be used to set out patterns because the foundation does not change.

In other words, human nature is the same and would not change from past to the future. As such, when a past occurrence can be seen to be as a result of fact (which is determined over a long period of time), it can serve as a sure way of understanding patterns.

However, it still doesn’t do so much in determining the future because it would never be complete.

History Only Provides Context

The best advisors have made it clear that historical information should not be used as a tool for decision making but as a means of understanding the context of a situation. Market data like trends in price, volatility measures over time, and the volume being traded by a company can help provide context.

That is, it can help understand why what is, is. It does not guarantee future results. Through detailed analysis of the past behaviour of stocks, investors can gain perspective. A good example of this is that past information can let the investor know what events are normal and which ones are simply extraordinary.

It helps you to avoid past mistakes and makes you take advantage of the opportunities of the future.

It Can Leave You Stuck In The Past – Or Shocked

Do you know what happens when you keep looking at your past? Just that. The problem with dwelling too much in past information is that you can be side-lined while the rest of the world moves ahead.

For example, the fact that a company tried expanding its business a few years ago and crashed its share price does not mean that if it tries the same thing now, it would fail. So, dwelling on the past in this case would only serve as a limitation.

In summary, while there are parts of history that do affect the future, most of it is hard and almost impossible to predict. Fixed and recurring patterns can help uncover facts where human behaviour is concerned and the best we can do with historical information is to learn from them. Anything else might have us pulling the carpet from underneath our own feet.

Written by Lawretta Egba.