26SEARCHING FOR NUMERIC CONSTANTS

It is possible that the previous chapter has dampened your confidence in using past financials as a guide to the future. But it's important to realise that this is just one story, and it was about an industry on the verge of extinction. The fact is, analysts commonly study past financials in their search for inputs to their valuation formulae. They do this because, as 18th-century politician Patrick Henry said, ‘I know of no way of judging the future but by the past.'

So, rather than rejecting the use of historical financials, let's ask another question: when can they be relied upon? Back in chapter 22, I mentioned Ian Little's study on the link between past and future corporate results, in which he concluded: ‘Any unbiased reader of this chapter must come to the conclusion that there is no tendency for previous behaviour to be repeated in the future.'

But does Little's conclusion apply to all types of businesses or just some? For example, are the past results of an established consumer staples company, with entrenched brand loyalty and a dominant position in its sector, more likely to be repeated than those of a tech company that is perpetually threatened by competitors developing better ways of doing the same thing? Let's explore this a bit further.

EXTRAPOLATING EARNINGS GROWTH — THE 1929 BULL MARKET

The year 1929 is etched in the mind of every stock market historian. The October 1929 Crash heralded the start of the worst bear market ...

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