Technical Analysis
Cole:I have seen many books written on technical analysis. What role does technical analysis play in the realm of the value investor and what can charts really tell us?
A:Technical analysis is the study of previous price movements in order to forecast future price movements. The use of charts is integral to technical analysis. Despite the name, it is neither technical nor analysis. A technical analyst will look at a stock's price chart and try to manufacture patterns of movement. The track record of technical analysis is worse than random guessing. Technical analysis states that the price of a stock determines its value at any given point. If you accept this premise, you deny that there is a chance of a discrepancy between price and value. Patterns can be manufactured for past data quite easily. If you stare at any chart long enough, you will find a pattern. Whether these patterns repeat themselves, I'll let the hordes of poor (financially, not metaphorically) technical analysts answer.
One of Graham's major concepts is that of Mr. Market. Imagine you have a friend, Mr. Market, who comes to you every day with a buying and selling price for your stock. Mr. Market is very happy some days. On those days he will offer you a very high price to buy and sell. Other days he is very sad. On those days he will offer you a low price to buy and sell. His mood tends to change with the weather. He is ruled by his emotions. If you are unsure as to the danger a highly emotional disposition presents, I recommend you read any of Shakespeare's tragedies. In fact, read any tragedy and you will find that it has been exasperated by a highly emotional character. Short-term price movements are like the daily mood swings of a lover. You should not let one happy day force you to propose marriage, nor should you end your relationship over one fight. It is how the relationship fares over the long run that demonstrates its quality. The same concept applies in investing. If you doubt the efficacy of any investing advice you hear, apply it to another situation. The beauty of investing is that all of its fundamental concepts translate to virtually every other human endeavor. Would you stop going to your favorite restaurant over one bad meal? Would you run away from home because of one fight with your parents? Would you drop out of school because of one bad test? If you answered no to all of these questions, then why would you buy or sell a stock based on a price drop or rise? Technical analysis is a way of putting a scientific polish on speculation. It looks like analysis, it sounds like analysis, and it may even be analysis. The question is whether the data you are analyzing has any relevance to the future value of a stock.
A:Technical analysis is the study of previous price movements in order to forecast future price movements. The use of charts is integral to technical analysis. Despite the name, it is neither technical nor analysis. A technical analyst will look at a stock's price chart and try to manufacture patterns of movement. The track record of technical analysis is worse than random guessing. Technical analysis states that the price of a stock determines its value at any given point. If you accept this premise, you deny that there is a chance of a discrepancy between price and value. Patterns can be manufactured for past data quite easily. If you stare at any chart long enough, you will find a pattern. Whether these patterns repeat themselves, I'll let the hordes of poor (financially, not metaphorically) technical analysts answer.
One of Graham's major concepts is that of Mr. Market. Imagine you have a friend, Mr. Market, who comes to you every day with a buying and selling price for your stock. Mr. Market is very happy some days. On those days he will offer you a very high price to buy and sell. Other days he is very sad. On those days he will offer you a low price to buy and sell. His mood tends to change with the weather. He is ruled by his emotions. If you are unsure as to the danger a highly emotional disposition presents, I recommend you read any of Shakespeare's tragedies. In fact, read any tragedy and you will find that it has been exasperated by a highly emotional character. Short-term price movements are like the daily mood swings of a lover. You should not let one happy day force you to propose marriage, nor should you end your relationship over one fight. It is how the relationship fares over the long run that demonstrates its quality. The same concept applies in investing. If you doubt the efficacy of any investing advice you hear, apply it to another situation. The beauty of investing is that all of its fundamental concepts translate to virtually every other human endeavor. Would you stop going to your favorite restaurant over one bad meal? Would you run away from home because of one fight with your parents? Would you drop out of school because of one bad test? If you answered no to all of these questions, then why would you buy or sell a stock based on a price drop or rise? Technical analysis is a way of putting a scientific polish on speculation. It looks like analysis, it sounds like analysis, and it may even be analysis. The question is whether the data you are analyzing has any relevance to the future value of a stock.
posted by Harvey Multani at 12:02 PM
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