Financial Times article: Technical Analysis is Rubbish

Discussion in 'Technical Analysis' started by ByLoSellHi, Jun 29, 2008.


    The heresies and swamis that can hurt your portfolio

    By John Train

    Published: June 28 2008 04:25 | Last updated: June 28 2008 04:25

    There are several heresies in the investment business that can harm you if you believe them. One is astrology. Probably almost no Financial Times reader will be troubled by that one, but you would be surprised how many readers of fashion magazines and the like give it attention.

    Another is “technical analysis” – the idea that by studying the shape of the market’s wiggly lines you can predict the future. Famous “swamis” have arisen, such as Joe Granville and James Dines whose pronouncements would move markets. Yet it has been only a matter of time before they crash and burn.

    A further heresy is the efficient market theory – the notion that since everything is known about the stock market, shares are at all times priced to reflect that knowledge, so there is no need to bother about the facts – just go with the flow. You cannot predict who or what will do better long term. In a public debate with the most famous proponent of this theory, I pointed out there were consistently better investors, like consistently better chess players. Consider Warren Buffett, who was the first chapter in the first book I wrote on great investors. The famous proponent replied that it was easy for Buffett, because he wielded so much capital that he bought whole companies, a capacity denied to most of us. Nonsense! Buffet himself often pointed out what an easy time he had putting smaller amounts to work when that was all he had. In fact, he has declared that he approves of the professors who espouse the efficient market theory, because they create more opportunities for him.

    Still another heresy that can cost you money is modern portfolio theory. It holds that rather than trying to understand companies and what they are worth, you should determine in advance what the market is going to do, and then buy the companies that will go up when what you have determined comes about. You establish coefficients for the companies within each category, so that if, for instance, the car sector is ready for a kick, the most volatile car stocks will be the ones to buy. But the most volatile companies are often the most weakly financed, so if business turns bad or the market heads south, they may be shot right off the board. Thus, a heresy, although still quite popular in certain theoretical circles.

    Yet another is the traditional desire for liquidity in all parts of an endowment portfolio, even though the principal of the portfolio will never be needed – only a 5 per cent a year draw, say. A handful of the greatest contemporary investors discovered this truth some years back and began with success putting endowment money into real estate, private equity and other illiquid assets. Jaws dropped on Wall Street when it was learned that Harvard, one of the most successful endowments, had put 8 per cent into timber, including forests. Forests! They are highly illiquid, but have charming long-term investment characteristics.

    A few years ago there was a bad heresy, which I will call the “Mac Bundy conception”. That remarkably clever man, then head of the Ford Foundation, let it be known that since the market had been rising steadily, foundations and endowments should assume this would continue, and spend more capital annually – more than the increase in the dividends they received. Under some circumstances there could have been merit in this notion, but by the time it was over the Ford Foundation had lost three-quarters of its capital, and many institutions had taken a terrible bath. Never assume that a portfolio will increase faster than the underlying earnings.

    Today’s heresy – which I find particularly annoying because it is so lazy intellectually – is claiming that volatility equals risk. What rubbish! Risk is when a company goes belly-up, a currency goes against you, or a country turns sour, such as Cuba; that is, the possibility of permanent loss of capital – which has nothing to do with inevitable fluctuations of the market.

    Here is an example. Suppose you like living in your house, hope to live in it for 20 years, and do not want to sell it. It will get more valuable over time, and is thus a good investment. But suppose you constantly priced it in a thin market, and one year it was up, and another down. Does that make it risky? No. As Buffett says, better a lumpy 14 per cent than a smooth 12 per cent.

    So what should you do? Buy a stock that, like your house, you know all about and would happily own at that price, in the absence of any market.

    The writer is chairman of Montrose Group, investment counsel in New York. He is the author of ‘Money Masters of Our Time’, ‘The Craft of Investing’, and other books.

    Copyright The Financial Times Limited 2008
  2. This article is "rubbish".
    It has nothing to do with TRADING.
  3. probably another failed daytrader.
  4. Bolinger bands, SMA, EMA, RSI, stochastic, money flow, envelopes, waves, money flow, blah, blah ,blah.

    10 "chartists" look at the same chart and see 10 different "patterns".

  5. Let´s be frank.....

    Who gives a flying shit what a nontrader thinks .....

    To be ultra frank....

    Fuck jouralists.....they do not trade....

    They sell their media....nothing else....

    Give them 25 centavos....

    Thus shut tfu .....

    Tinker toy idiots at best.....

    Paper point whores...FO


    Try to sell your crap somewhere else......

    The ultimate in stupidity.....
  6. Before my last post I didn't even read the article.

    The article had nothing to do with technical analysis or trading.

    Close this shitty worthless thread.
  7. joemiami

    joemiami Guest

    This is exactly the kind of thread that just kills a new traders self confidence. WTF ??? Take this shit down !!

    BuyLoSellHi....nothing personal against you but this thread doesnt help anybody in here...
  8. Looking at charts patterns is a game of odds not prediction!

    Chart patterns are gonna give the interpreter more probable opportunities. If the interpreter has no sense of risk management or no discipline its real easy to blame it all on Technical Analysis. I'm so sick of this argument! Most people misuse Technical Analysis as some sort of forecasting tool! It simply helps the trader put the odds on his favor!
  9. Such a pice of crap, you guys are right another trader who failed
  10. yayt


    A lot of what he said is true (I believe).

    IE, I doubt many here believe in the Efficient Market Hypothesis.

    I am not sure a lot of people would also argue with the idea that volatility = risk.

    In addition, as has been said previously, a lot of technical analysis is completely subjective and so relies a lot on the trader themselves - but regardless, I think this is the only part of the article I disagree with.

    If anything, the author's other points are helpful to others here, especially the new ones.
    #10     Jun 30, 2008