Charting, etc

There are a few well known shares investment managers who have, whether by luck or by skill, consistently outperformed the market indices. But none of them have done it by following charts (or so called "technical analysis"). It is sad to note the huge amounts of time wasted on trying to make money by "interpreting" charts. And sadder still to see the amounts of money wasted by those who think that they can make money using charting.

The explanation for the popularity of charting appears to be that human beings "see" patterns in random phenomenon. As one would expect, in this age of super fast computers, every "pattern" of share prices has been analysed to see whether money can be made from it and no such patterns have been found.

Some succesful investment professionals like Anthony Bolton do use charts. But even they use it only to support their fundamental analysis. By and large most successful investment professionals and academics do not consider charts to be useful in making investment decisions:

Benjamin Graham

•  ...guided by charts...so called "technical approaches"...over 50 years, we have not known a single person who has consistently or lastingly made money by this "following the market".

Benoit Mandelbrot

• As any chartist has learnt to his sorrow, the most random and independent events can spontaneously appear to form patterns and cycles.

Burton Malkiel

• Short-run changes in stock prices cannot be predicted.

• The financial institutions have the funds to move the price so rapidly that no chartist could get into the act before the whole play is gone. If some people know that the price will go to 40 tomorrow, it will go to 40 today.

• I have never known a successful technician but I have seen the wrecks of several unsuccessful ones.

• The basic premise is that there are repeatable patterns in space and time. These technical rules have been tested exhaustively by using stock price data on both major exchanges going back as far as the beginning of the twentieth century. The results reveal that past movements in stock prices cannot be used reliably to foretell future movements.

• If you examine past stock prices in any given period, you can always find some kind of system that would have worked in a given period. If enough different criteria for selecting stocks are tried, one will eventually be found that selects the best ones of that period. What most advocates of technical analysis usually fail to do is to test their schemes with market data derived from periods other than those during which the scheme was developed.

• Any successful technical scheme must ultimately be self-defeating. If people know a stock will go up tomorrow, you can be sure it will go up today.Fred Schwed

• All I was ever able to conclude from my studies was that chart reading is a complex way of arriving at a simple theorem, to wit: When they have gone up for a considerable time, they will continue to go up for a considerable time; and the same holds true for going down. This is simple but it does not happen to be so.

• It is the popular feeling in Wall Street that chart readers are pretty occult professors but that most of them are broke.

Gerald Loeb

• For most people charts have a peculiar way of appearing simple and it is very costly to find out that they are far from it.

• In the second class, I would place self-styled accomplished chart or tape readers who are guided exclusively by what they think they see in lines on the charts. My guess is that they lose in the long run.

John Neff

• Poor performance often occurred as a consequence of a technical orientation that tried to predict peaks and troughs in stock charts. It assumed that where a stock has been implies where it is going. Playing the technical or momentum game always has seemed misguided to me.

John Train

• The problem with momentum investing is that the river rushes most rapidly just before it plunges over the falls.

Peter Lynch

• Thousands of experts study overbought indicators, oversold indicators, head-and-shoulders patterns, put-call ratios … and they can’t predict markets with any useful consistency. I don’t pay much attention to that science of wiggles.

Warren Buffett

• Investment success will not be produced by arcane formulae, computer programs, or signals flashed by the price behaviour of stocks and markets. Rather an investor will succeed by coupling good business judgement with an ability to insulate his thoughts and behaviour from the super contagious emotions that swirl about the marketplace.

• Investors should be skeptical of history-based models. Constructed by a nerdy-sounding priesthood using esoteric terms such as beta, gamma, sigma and the like, these models tend to look impressive. Too often, though, investors forget to examine the assumptions behind the symbols. Our advice: Beware of geeks bearing formulas.

• I know of no way to reliably predict market movements. 

• Investors, of course, can, by their own behavior, make stock ownership highly risky. And many do. Active trading, attempts to “time” market movements, inadequate diversification, the payment of high and unnecessary fees to managers and advisors, and the use of borrowed money can destroy the decent returns that a life-long owner of equities would otherwise enjoy. Indeed, borrowed money has no place in the investor’s tool kit: Anything can happen anytime in markets. And no advisor, economist, or TV commentator – and definitely not Charlie nor I – can tell you when chaos will occur. Market forecasters will fill your ear but will never fill your wallet.