Five Things You Need to Know: Be the Pattern, Good For the Goose, Garbage, Waiting Game, Follow the Money
Nobody gets paid to wait, but large pools of money are paid while they wait.
Editor's Note: While we congregate in Vail for Minyans in The Mountains 3, we asked each Professor to prepare some thoughts on fiscal literacy, how to listen to the market and their area of expertise.
1) Be the pattern: Mass psychology (fear and greed) dictates price (supply and demand), which charting and technical analysis (T/A) express numerically. Those numbers reveal human influences on price action, allowing traders to bond with the market and to anticipate its next moves.
2) Good for the goose, and for other gooses, too: Fear and greed are constants among all markets and their participants. So, charting and T/A provide a common denominator that cuts across industry, exchanges, geographical boundaries - and even across centuries - where fundamental nuances do not.
3) Garbage in, garbage out: Mainstream generalizations of technical analysis aren't necessarily wrong but they're ripe enough only for mainstream consumption. All too often a "breakout" to new highs is actually false, "basing" is just a continuation pattern, and a "trendline" is just a polite suggestion.
4) Timing, trending, target: Fundamental analysis gets paid for being ahead of the curve, charting and T/A gets paid for being as late as possible. Some models require buying "straw hats in January" - during a consolidation or before a bottom. Nobody gets paid to wait, but large pools of money are paid while they wait. Leaner models can afford only to wait for the inflection point where value (or lack thereof) starts being perceived widely, and where a position's time exposure can be limited.
5) Follow the money: There are only several basic patterns, and not many variations. It's the combinations among them where things get interesting. Regardless, they're all identifiable and tend to resolve predictably. This isn't absolute, but that's what stops are for.
- Good indicators are equally valid in rising markets as they are in falling markets. Great indicators aren't. Shoeshine boys were quick with the stock tip as the Dow was peaking in 1929. But they weren't very helpful at 1933's bottom. Neither were dress shoes.
- When financial media and market pundits agree on the cause of a rally or a decline, you can cross that item off your list of things to be concerned with.
- For every buyer, there's a seller. One is right, and the other is wrong. Unless they're both right, or both wrong, in which case they probably have different objectives and their paths will never cross anyway.
- "Independent analysis" cannot be unbiased. While one might not be invested in a position, he is certainly invested in his opinion. "It matters not what one believes, so long as he does not altogether believe it."
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