The trend is your friend

‘The trend is your friend’ say those who use share price charts to try to predict the future. That may well be right, but I’m not so sure.

Do past share prices know what future ones will be?

Does tomorrow’s price care what yesterday’s was? Of course, the chartists aren’t really expecting the share price itself to move — they’re assuming that the views of the market will continue to hold sway… if investors were pessimistic, they’ll probably be pessimistic tomorrow.

It’s an alluring thought, but one I’m not sure is sustained by the weight of history. It’s certainly not how I choose to invest.

If the stock market really is inefficient — and it is — and irrational — which it also is — then assuming the future will be determined, in some sort of knowable pattern — is a very ambitious view, as Sir Humphrey might have told his Minister.

But there is some value in the phrase ‘the trend is your friend’ — even if not in the way those chart-based investors would suggest. The key is to business or industry — not price — trends and whether or not they are reliable.

The trend doesn’t always help

Indeed, being able to take a view of the future — however dimly — is vital when it comes to investing.

Don’t believe me? Ask the people who owned Kodak shares when digital photography sent the company broke.

Or Blockbuster shareholders. Or Nokia’s.

More simply, think about the decline of the corner store in the face of supermarkets, or the death of the textile industry in Australia, given lower labour costs, overseas.

These things are obvious in hindsight, of course. But if you were left holding the baby when things went south, the memories will be bitter ones.

And more pertinently, more companies will be added to that list in the months and years ahead.

Think back a couple of decades, pre digital photography. It’s hard to do, but try. Can you imagine how Kodak could possibly have been knocked off its perch by another film or camera-maker? I can’t.

The change that undid them wasn’t someone doing a little better, but a complete disruption.

And yet, the right trend can be your friend

How is it possible, given those examples, that the trend can still be your friend?

Because, simply, trends change. New trends emerge, others die. There are very few companies that go from world-beating to the garbage bin in three months. The story of Kodak’s demise was of a company that simply couldn’t — or wouldn’t — respond to a new world of digital technology.

Movie downloads have been around now for more than a decade. Streaming for almost as long. Low cost labour from the subcontinent was around for a long time before the Australian textile business died.

And no-one can be surprised that car makers are finally shuttering operations.

Most of the money, time and time again, is lost by those who refuse to see the ‘new world’ — either new, more relevant competitors, disruptive companies or technologies, or a change in consumer behaviour.

Don’t follow the trend

To say ‘the trend is your friend’ is easy — even trite. And when there are competing trends, it can be hard to determine which one to follow. But that can be the difference between investment success or failure.

Ignore price trends. When it comes to trends in business here’s a simple rule: If in doubt, follow the money. When businesses or consumers decide to back a new product, company or technology, be careful you’re not standing in the way.

JUST RELEASED! Our top dividend stock for 2015-2016

If you're after fat, fully franked dividends, you won't want to miss this. The Motley Fool has just issued a brand-new report, complete with all the details on our expert analysts' #1 dividend stock for 2015-2016. Click here now for your FREE copy, including the name and code!

Two New Stock Picks Every Month!

Not to alarm you, but you’re about to miss a very important event! Chief Investment Advisor Scott Phillips and his team at Motley Fool Share Advisor are about to reveal their latest official stock recommendation. The premium “buy alert” will be unveiled to members and you can be among the first to act on the tip.

Don’t let this opportunity pass you by – this is your chance to get in early!

Simply enter your email now to find out how you can get instant access.

By clicking this button, you agree to our Terms of Service and Privacy Policy. We will use your email address only to keep you informed about updates to our website and about other products and services we think might interest you. You can unsubscribe from Take Stock at anytime. Please refer to our Financial Services Guide (FSG) for more information.