The reliance on historical data or trends is overwhelmingly high and in most cases resulting in high inaccuracies in forecasting the future when used blindly.

So why do we still use historical data and depend on them so much? Why do we always look at a company’s financial statements, past 5 to 10 years annual reports?

All these while we clearly know that what happened in the past may not equate to the future.

Simply, it is easier and the numbers are accurate and readily available. And it is virtually impossible to accurate forecast future results anyway.

So how should we look at historical data differently to help us then?

Does increasing revenue for the past 10 years indicate the next 3 years of increase as well?

Does increasing dividends for the past 10 years ensure consistent dividend payout subsequently?

Or perhaps, we can look at historical data to tell us things that are much more subtle but yet consistent with the vision or capabilities of the management?

Example:

For the past 10 years, every time when a significant capital expenditure is registered, it is always followed by an improvement in margins for the next 3 years.

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As the future is uncertain and businesses will be affected by macroeconomic factors which are out of their control, it will be an understatement to say that it is risky to bank your bucks only on historically proven records.

As such, historical data is merely a tool, a window or a time machine which we can use to understand the business.

A peek into the past of what was done, how was it done and what may be done (if used correctly) but never what may be.

What may be is merely one of the possible results of what had been done.

Thank you for reading.

~ 讀萬卷書不如行萬里路