Just in the course of a normal week, we are bombarded with information from sources such as the FED, television analysts, brokerage firm analysts, economists’ projections, newspapers, junk mail, neighbors, war reporters, fake news, etc. Making investment decisions without a plan or methodology is truly a gamble. And to think that there are academic types who advocate that the markets are efficient, which means everyone has all the available information at the same time, and therefore cannot possibly get an advantage over anyone else is preposterous! Then when you add the “investors are rational” tag, it gets even worse. What I think is truly sad is that our educational system is tied to this drastically common and unchallenged line of thinking.
All of this is noise - period. Noise is the short-term interference that causes investors to deviate from a well thought out investment plan. Noise is difficult to ignore because at the time it seems so important. The emotional roller coaster of trying to utilize all this information can have a devastating affect on your wealth…and your health. Most investors would do well to read a weekly publication on Sunday afternoon. This would summarize the events of the entire week and then be a couple of days old upon reading.
Here are some of the problems with all this noise: Have you ever noticed how Wall Street and the elected officials try to “explain away” any negative information or market indicator? Eventually when there are mounting numbers of negative reports, it becomes almost comical. There are other types of noise that affect investor’s perceptions about investing. These are the myths that proliferate on Wall Street and most of the financial community. I will go on record stating that all of these noise events cannot be found on a long-term chart of any market index (with the dates removed). Why is this? Free markets trend (ebb and flow) based upon the laws of supply and demand, which is the grand total of opinion of all who are actively participating in the market with real money. Remember this – it does not require the opinions of market analysts, television personalities, brokerage experts, or anyone similar to affect the thinking of others. See the problem? They are feeding you, if not creating, noise.
Some of the myths I was referring to that cannot be pointed out on a chart are as follows. Disasters – most people think disasters have lasting affects on the markets. Do you know that within five market trading days after 9/11, the market began an up move that rose over 20%? Other examples are Eisenhower’s heart attack, the Kennedy assassination, major hurricanes (Gloria), war (other than when they close the exchanges), Oklahoma City bombing, on and on. So why do people think they have lasting affects on the markets? Simply because at the time it is a horrible event and you cannot imagine life afterwards. Most people extrapolate the short-term (noise) into the future. Sorry, that just does not play out in the long-term trends of a freely traded market.
Additionally, there is a strong belief that the stock market goes up over the long run. It does! Unfortunately, the insertion of your life and your period for accumulating wealth may not fall in sync with the good long-term up trends of the market. I consider that most have a wealth accumulation period from their 40s to the early 60s (about 20 years), realizing that everyone is different. I have a friend who became an institutional broker in the very early 1980s and retired in 2000. He readily admits he lived a charmed life and knows it was just luck that he was a broker during the last great bull market. Sadly, Wall Street wants you to think it is always a bull market.
All of the noise is difficult to ignore because at the time it seems so important. This is further support for a sound rules-based technical model that totally eliminates all of this noise and the associated emotions that it creates. As I already stated, most investors would be better off with professional money management – let someone else filter the noise. Of course, I’m talking about those money managers who use a defined process. Next time you get excited about some event or news item, think of it as raw meat thrown into a pool full of piranhas. The pool is calm, and then as soon as the meat hits the water, there is a flutter and splashing that lasts for just a few minutes; the meat is gone, and the pool is once again calm. Just a couple more thoughts! Remember, the biggest and most frequent sources of noise are the quarterly earnings reports. Finally, beware when you hear “it is different this time,” as it probably is not.
I will be at ChartCon 2018 in Seattle for next week and the following. This is probably the best event for technically oriented traders that ever existed.
Dance with the Trend,