Thirty-five years ago, during my time as a portfolio manager for Canada’s leading wealth manager, I developed a short presentation on technical analysis for groups of prospective clients. Never did I fail to deliver the message that interpretation of squiggly lines is rather subjective – beauty is in the eyes of the beholder as they say.
I had three examples, which I will describe here.
Using an overhead projector and opaque slides – remember, this was 35 years ago – I flashed a series of images on the screen, while asking the audience for their opinions.
In the first example, I said I had three slides. After presenting the first one, the audience was unanimous in their view that the stock should be bought. Clearly the squiggly lines reflected that. The second slide got a mixed reaction, some said yes and some said no. The third slide elicited a definite no response.
Wow, I said, this is the same stock. I had shown them hourly, daily and monthly data charts. They got the message that timing is everything and timing studies require a picture of a complete cycle before one should come to any conclusion.
For the second example, I showed them a weekly data chart of a well-known company – GM as I recall – and the audience uniformly thought it would be a good buy at that time. Then, without showing the chart, I asked if they would consider buying the stock of another well-known company in the Dow 30, one that was being trashed in the media at the time – I think maybe it was AT&T or Citigroup but obviously in a different industry – and most of the audience had already made up their mind they didn’t think that was a stock they would buy. Then, I presented the chart on the screen and quickly overlaid it with the first one – the one they all liked as a Buy.
Presto, just like magic, the audience was flummoxed, thinking I had simply switched the name on the second chart. The charts looked identical, and yet a clear bias had interfered with their judgement. They got the message that trading and portfolio management requires objectivity, at least to the extent we can have it.
For the third example, I showed an hourly data chart of an unnamed stock I called ABC. The audience immediately thought the price pattern represented a good buy. I then turned over the same chart to its upside-down view and the audience did not agree that ABC should be sold. I told them that the second view was the real one, and asked them if they were so ready to buy, why would they not sell.
When I showed them the chart of ABC in the following weeks, the stock price had collapsed. Clearly, they should have sold. It was at that point I told them that stock holdings are not like children. They are only prices and we trade prices. We buy and we sell based on independent analysis. In other words, if you are going to use TA, you must use it consistently.
During those years I knew a high-profile securities analyst in Canada who had retired in order to join a team of entrepreneurs that was soon to start what would become one of Canada’s largest mutual funds. He asked if I would manage his account during the interim period, telling me that he liked that I made decisions like a mechanic – with knowledge but without emotion. If only, I said, I wasn’t human. Computers, I opined, were not human and would sooner or later rule the market, taking unfair advantage of human weakness – playing the players as it were.
Even in the early 1980’s, I argued that at some point the market would become a place of dueling computer systems. Never did I realize then that central banks, sovereign funds and massive pension funds would enter the field with their computers and their ability to manipulate media, playing on the public’s emotions.
Today, computers in the hands of owners who care more about controlling price direction than price discovery are able to create whatever squiggly line in a price chart they know will make them winners and the rest of us losers. In my view, the only way we can compete is to make decisions like private equity professionals, seeking long-term investment in high value companies at times those squiggly lines in the monthly price series data of their listed stocks have reached extreme oversold levels.
If you happen to be new to investing in listed securities, you can still learn the principles I was teaching in the 1980’s, and I think it is important to do so. I will say that technical analysis has not changed much in my time; but the players and their intentions have. It is harder to succeed as a trader today because you are fighting the latest and greatest in computer technology backed by endless amounts of money. While TA is important, you will also have to understand the value underlying the securities you are buying.
I don’t think you can do that with Exchange Traded Funds; but that’s a story for another day.
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