Stock Chart

A stock chart (also known as a 'price chart') is a graphical representation of a stock's price and trading volume over a set period. Think of it as a visual diary of a company's journey in the stock market, plotting its ups and downs. The vertical axis typically shows the price, while the horizontal axis shows time—from minutes to decades. These charts are the primary tool for practitioners of technical analysis, who believe that historical price action and patterns can forecast future movements. For the value investor, however, the role of a stock chart is very different. It's not a crystal ball for predicting the future but rather a useful window into the market's past and present mood, offering clues about the psychology of other investors. While a chart shows you the price history, it tells you nothing about the underlying business's health, profitability, or long-term prospects, which are the cornerstones of value investing.

To a value investor, a stock chart is a bit like a gossip column: entertaining, occasionally insightful about popular opinion, but a terrible source for making serious decisions. The core philosophy of value investing, pioneered by Benjamin Graham and championed by his student Warren Buffett, is that a stock is not just a squiggly line on a screen; it's a piece of ownership in a real business. Therefore, the decision to buy or sell should be based on the company's intrinsic value—what it's truly worth based on its assets, earnings, and future prospects.

The investment world is broadly split into two camps on the utility of charts:

• Technical Analysts (or 'Chartists'): These investors live and breathe charts. They use patterns, trends, and indicators like the moving average to make buy and sell decisions. They believe that all known information is already reflected in the stock's price and that human psychology, which drives market movements, tends to repeat in predictable patterns.
• Fundamental Analysts: This is the camp where value investors reside. They couldn't care less about 'head and shoulders' patterns or 'golden crosses'. Instead, they pore over financial statements, calculate ratios like price-to-earnings (P/E) ratio, and analyze a company's competitive advantages. They believe the market is often irrational, creating discrepancies between a stock's price and its true value. Their goal is to exploit this gap.

Warren Buffett famously quipped, “I realized technical analysis didn't work when I turned the chart upside down and didn't get a different answer.” This perfectly captures the value investor's skepticism. The chart shows you the price; fundamental analysis helps you determine the value. The profit is made in knowing the difference.

So, should a value investor completely ignore charts? Not necessarily. While they should never be the primary reason for an investment, they can serve as a useful secondary tool.

• Gauging Market Sentiment: A stock chart is an excellent illustration of Mr. Market's mood swings. A sudden, sharp price drop on high volume clearly shows panic. For the disciplined value investor who has already done their homework and determined a company is a great business, this panic can signal a fantastic buying opportunity.
• A Sanity Check on Entry Points: Let's say your research shows a stock is worth $50, and it's currently trading at $35. You've already decided to buy. A quick look at the chart might show that the price has been in a freefall. While you don't believe in technical support and resistance levels, this might suggest it's wise to wait a few days for the panic to subside rather than trying to “catch a falling knife.” You might be able to buy at $30 instead of $35, increasing your margin of safety.

Even if you don't plan to become a chartist, knowing the basics can help you understand the market's story.

• Line Chart: The simplest type, created by connecting the closing prices over a period. It's great for a quick, clean look at the general trend.
• Candlestick Chart: This is a bit more detailed and very popular. Each 'candle' represents a trading period (usually a day). The main body of the candle shows the range between the open and close price, while the thin 'wicks' show the highest and lowest prices reached during that period. A quick glance can tell you if it was an 'up' day or a 'down' day and how volatile the trading was.
• Volume: Usually shown as bars at the bottom of the chart. Volume represents the number of shares traded. A price move accompanied by high volume is considered more significant than one with low volume because it means there was strong conviction behind the move.

For the intelligent investor, a stock chart is a tool, not a guru. It should be one of the last things you look at, not the first.

1. Step 1: Do your homework. Analyze the business, its finances (earnings per share (EPS), debt, cash flow), its management, and its competitive position to determine its intrinsic value.
2. Step 2: Compare that value to the current market price to see if there is a sufficient margin of safety.
3. Step 3: Only then, glance at the chart. Use it to understand the recent market sentiment. Is the market euphoric or terrified? This can help you fine-tune your entry point, buying when fear is highest and prices are most attractive.

Ultimately, a chart is a picture of the past. Value investing is a discipline focused on the future of the business. Never let the picture distract you from the facts.