Fin24 user Jeremy Samson writes:
THERE is a sub-group within investing which is home to the "technical analysis" geeks - a rare breed of quasi-investors who have created a whole discipline by extracting data into graphs that no one ever bothers to look at.
I guess they do have their place in society: they can understand the Duckworth-Lewis scoring methodology that leaves thousands of cricket supporters perplexed and confused when they discover that, because of a change of weather, their team has suddenly lost a game that they appeared to be winning.
But that’s as far as their skills set extends.
Accountants are notorious for a having no handle on reality and this unique sub-group of guys is even further removed from what’s happening on the ground.
They choose to look exclusively at the numbers without any consideration for what is actually going on. I read recently that "British American Tobacco [JSE:BTI] is showing signs of heading towards an outbreak." (Perhaps it was a breakout.) It had breached the one section of the graph, some geek excitedly pointed out.
The share then proceeded to go limp for a few weeks. Probably, I reckon, something to do with the PE being over 20 and the Australian government imposing some draconian law stipulating that all packs need to be olive coloured in future.
This wasn’t in the graph though.
I have never read a snippet of technical analysis and thought "I bet this person is a bundle of laughs at drinks parties" They seldom even mention what it is that the company they are "analyzing" does.
I went to an Allan Gray presentation once. There an enthusiastic blonde-haired guy took the stage and began wildly pointing at some graphs explaining how the stock market was over-valued.
The lines were all in the wrong place, the yields were rubbish and if you looked at the graphs carefully you’d be able to see how the whole system was on the brink of meltdown.
I remember the market was below 30 000 at that stage. I also remember pretty good finger food and thinking "I should really rebalance my portfolio" which, thankfully, I never got round to doing.
In their defence: how were they to know that we’d have more QEs than there are Queen Elizabeths? That Ben Bernanke likes inflation more than unemployment, and that when fixed income yields are in low single figures people tend to plough money into the stock market. For them the future wasn’t what it used to be.
Graphs do, I guess, have their place. They are a great visual way to understand the past and, to a smaller extent, extrapolate what might happen in the future.
But as far as connecting arbitrary points and then making sweeping statements about the direction of share price movements – I’m sorry. Nope.
I guess when it comes to the final analysis: to each his own. I am only 1.68 cm tall. I just extrapolated my two-year-old daughter’s growth chart.
Things are showing huge upside potential. I just worked out that she is destined to become an 8 ft tall supermodel. This is surprising, considering my stature.
Either that or there’s something my wife isn’t telling me.
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