I Think The Best Stock Charts Should Have Three Basic Components

The new Yahoo Finance for iPad App was released and it is really nice even though I have an issue with some of the stock charts.

This morning, I’m sitting on the sofa in my living room drinking a cup of black coffee from an oversized black coffee mug I bought during my college years from the campus bookstore, wrapped in a soft, white, heavy Brooks Brothers robe and going over some of the portfolio when I see that Yahoo Finance has released a new iPad app. I grab my iPad, which is laying on the coffee table, and download it.

Overall, the team at Yahoo Finance did a great job. The iPad app is clean, intuitive, and beautifully designed. The problem I have is with the way the data is displayed. The stock charts are a particular indicator of what is wrong with how the average American thinks about money.

All stock charts should have three basic components available.

1. The Best Stock Charts Should Have the Ability to Switch Between Regular Stock Chart Mode and Logarithmic Display Stock Chart Mode

Take a look at the stock chart for General Electric going back through the 1960′s. What is your first thought?

The stock chart would indicate that all of the gain happened from 1990 onward. But that is because the chart designer didn’t put the display in a logarithmic format, which is what Peter Lynch would use at Fidelity (pick up a copy of his older books and look for yourself). That is, if a stock goes from $1 to $10, that is a 10-fold rise, or 1,000%. From $10 per share, to generate the same return would require the stock to go to $100 per share not add another $10 for $20 per share (that would only double your money).

When a stock chart isn’t presented in logarithmic format, it visually tricks your mind because of how we are wired. The first bar on this regular stock chart showing $0 to $10 for GE is the same percentage gain as the next 5 bars going from $10 to $50 per share combined. What counts in investing is the return on your money as a percentage.

2. The Best Stock Charts Should Have a Second Line Showing the Incremental Return Generated by Dividend Distributions

If you own a stock that was $25 ten years ago and still remains $25 today but you collected $50 in special dividends over that time period, a regular stock chart isn’t going to show you that information. You might erroneously conclude that the investment hasn’t generated any return for the owners.

3. The Best Stock Charts Should Have a Third Line Showing the Total Return Generated By Buying and Holding a Stock and Reinvesting All Dividend Distributions and Spin-Offs

Most of GE’s returns, just to use them as an example, have come from dividends and reinvesting those dividends. The above stock chart does a pathetic job at illustrating the total investment gain generated by owners of the company. This would require someone to code the computer system but databases are almost entirely automated today so it should be easy. An investor should be able to enter a date, enter the amount of money invested, and then have a stock chart drawn in real time that shows the value of the holdings if dividends had been reinvested. They should be able to add lines and record subsequent purchases on specific dates and have the same data recalculated in real-time.

This is true because anyone who pays attention to the details of finance knows that going back to the 1950′s, someone who owned Johnson & Johnson did well as the stock price rose and dividends increased. But another investor that reinvested all of his or her dividends back into more shares of Johnson & Johnson would be magnitudes richer than our first investor; exponentially richer, in fact.

This is one of the reasons I hate stock charts and using stock charts in my investment process. They are simply too limited by the current data providers to accurately portray what has happened with a company unless the firm is a young startup that retains 100% of its money and grows quickly. Those represent a small part of our overall business activity in this country.