While you always have to keep your eye toward the future when investing in stocks, the past can provide important metrics about your portfolio.
For example, I always like to follow the trailing PE versus the forward PE. The forward PE is built on expectations of earnings in the future. Unfortunately, no one has a crystal ball. Earnings growth assumptions are built into forward PE's at a even higher rate than trailing PE's. The music could stop and you could be left with a high exposure to losses in a down draft.
I like to compare the PE's and dividend yields of my holdings based upon the historical earnings and dividends relative to my purchase price. This is a relative measure of margin of safety. Yes, the earnings may decrease and dividends may be cut in a down economic environment, but here is where sensitivity analysis is well suited.
Again, looking to the future and understanding the current position of your company's finances are important. But, historical evaluations keep you grounded and assist you in avoiding getting overextended on future expectations.
When the market is high, it is the best time to exercise caution. After all, when the music stops, it is better to have a chair near by!
