Charts

Charts are visual representations of a stock's price, volume, or other data over a specific period. Think of them as a historical diary of a stock's journey, mapping out its ups and downs with lines, bars, or colorful candles. In the world of investing, charts are the primary tool of the technician, a type of analyst who believes that all the information you need to know about a company is already reflected in its stock price. Practitioners of technical analysis study these historical patterns, trends, and shapes, believing they can forecast future price movements. They search for clues in the chart's “language,” hoping to predict whether a stock will rise or fall next. For a value investor, this approach is viewed with deep skepticism. Value investing is a discipline rooted in fundamental analysis, which involves digging into a company's financial health, competitive advantages, and management quality to determine its true underlying worth, or intrinsic value. From this perspective, a stock's past price movements are little more than a record of market popularity contests and emotional swings. They tell you about the mood of other investors, but they reveal almost nothing about the long-term earning power of the business itself.

Investors are generally split into two camps regarding the utility of charts. Understanding this division is key to seeing why value investors treat them with such caution.

For a technical analyst, the chart is everything. It's the canvas on which they believe the eternal battle between buyers (bulls) and sellers (bears) is painted. They use various types of charts to identify patterns and signals:

• Line Charts: The simplest form, connecting closing prices over time to show the general trend.
• Bar Charts: Show the opening, high, low, and closing prices for each period.
• Candlestick Charts: Similar to bar charts but use a “body” and “wicks” to more vividly illustrate the price action within a period.

Technicians look for specific formations with colorful names like “head and shoulders tops,” “double bottoms,” and “golden crosses.” They also draw trendlines and identify levels of support and resistance, which are price zones where a stock has historically had trouble falling below or rising above. The core belief is that history repeats itself, and these visual patterns hold predictive power. As the legendary investor Benjamin Graham might say, this is the market acting as a voting machine—a tally of daily opinions and emotions.

Value investors, on the other hand, follow a different creed. They are business analysts, not price-pattern diviners. Their goal is to determine what a business is fundamentally worth and buy it for significantly less. As Warren Buffett famously stated, “If the business does well, the stock eventually follows.” From this viewpoint, relying on charts is like trying to drive a car by looking only in the rearview mirror. The past price path tells you where the stock has been, but it says nothing about the road ahead—the company's future profits, its competitive landscape, or the quality of its leadership. A chart cannot tell you if a company has a durable economic moat, a mountain of debt, or a brilliant new product in the pipeline. Value investors believe these are the factors that will ultimately determine a stock's long-term success. Buffett once humorously dismissed technical analysis by noting, “I realized technical analysis didn't work when I turned the chart upside down and didn't get a different answer.”

While charts are never a primary tool for a value investor, they aren't entirely useless. They can serve a few limited but practical purposes, as long as they are kept in their proper place—as a source of context, not a crystal ball.

A quick glance at a 5- or 10-year stock chart can provide instant historical context. Has the stock price been a steady climber, or is it prone to wild, terrifying swings? Did the price just fall off a cliff? Seeing a stock that has dropped 70% in six months doesn't trigger a “buy” signal. Instead, it triggers a question: Why? The chart provides the “what”—a dramatic price drop—which prompts the value investor to begin the real work of discovering the “why” by investigating the business fundamentals. Is the company facing a temporary, solvable problem, or is it on the brink of disaster? The chart points you where to start digging.

Charts are an excellent illustration of Mr. Market's emotional state. When a chart shows a stock in a steep, prolonged dive, it’s a visual representation of widespread fear, pessimism, and panic. For a value investor, this is not a sign to flee. On the contrary, it’s a signal that Mr. Market might be offering a wonderful business at a foolishly low price. The chart of a great company's stock during a market crash is the picture of opportunity. It helps you see the pessimism that you can then exploit with rational, business-focused analysis.

For a value investor, charts are a sideshow, not the main event. They are a record of past sentiment, not a predictor of future value. Relying on them to make investment decisions is a dangerous distraction from the real task: understanding the business you are buying. Use a chart to get a quick sense of a stock's history or to visualize the market's current mood. But when it's time to decide whether to invest your hard-earned money, turn off the chart, and open up the company's annual report. The story is in the numbers and the business, not the squiggly lines.