What's the optimal look back time when evaluating equities? In some cases I get drastically different results by looking back 10 years as opposed to 5, etc. (07/09/2012)

Drawing Graphs:  Shorter Time Frame vs Longer Time Frame

Although it is a very important question, there is no exact answer which would apply in all cases. However, there are some helpful suggestions that we can offer you. First and foremost, your goal should be to try to draw a graph that makes the most sense. In some cases this may mean removing an anomalous number that skews the results. For example, if a company you are drawing with a ten-year graph has nine years of similar growth like say 8% to 12%, but one year where earnings grew at 400%; this last number distorts the true average. Therefore, you would want to draw a graph for a time frame that eliminated the bad number.

Also, I find it useful to start out drawing a 20-year graph, and then reducing the number of years in increments of five. In other words, draw a 20-year then a 15-year followed by a 10-year followed by a 5-year. This exercise allows you to determine if the earnings growth rate is accelerating or decelerating. This is obviously important information to have. However, keep in mind that the F.A.S.T.  Graphs™ tool is dynamic automatically calculates and applies the appropriate earnings multiples to various levels of growth (GDF, P/E=G, and GDF...P/E=G).

There are many other suggestions that would turn this response into an epic book, but I hope you're getting the idea.  So as a final comment to this response, let me add that in theory at least, shorter time frames can be more meaningful than longer time frames. In other words, growth for the last three or four or five years may be more indicative of future growth than the past 20 years. On the other hand, the long term record provides considerable insight into how well a company has historically been managed. This can be especially meaningful when evaluating dividend growth stocks. If you're counting on dividends, long-term record, payout ratios etc. can add that depth of insight.