“This broader category of essentially valueless methodologies includes what are popularly known as technical analysis and market timing. The idea behind technical analysis is that a market’s price action reveals to the careful observer what other investors have learned about fair value. For example, investors who estimate fair value using economic and business data (so-called fundamentalist investors) reveal these estimates to the watchful and skilled market technician via the buying and selling they do to take advantage of their models’ estimates. In this way a market technician believes he can piggyback his analysis upon the efforts of the fundamentalist investors. When he does this, he amplifies the effects of fundamentalists’ buy and sell decisions.
In the standard technical analyst tool kit one finds various forms of price chart interpretation, momentum and moving average trading strategies, and overbought-oversold oscillator methods. These tools are too widely known and studied to help you earn above-average returns on your investments. Any advantage they might confer is soon competed away in the profit-seeking rush of technical analysts to adopt them. Of course one cannot rule out the possibility that there are market-beating technical methods. One can only deduce that you will not read about them in a book!
A market timer is someone who attempts to beat the market by predicting the swings in market prices ahead of time and acting on these predictions. Technical analysis typically plays a big role in most market timers’ decision processes. But market timing is in general a fruitless activity for the same reason that technical analysis fails.
Think about market timing like this. If a market timer is to be successful he must be right twice in a row—he must first buy low and then sell high. So let’s suppose our hypothetical market timer is quite skilled and has developed a method that predicts and takes advantage of the direction of a market’s upcoming move 70 percent of the time (most methods I have seen don’t come close to this success rate). The probability that this market timer is right two consecutive times is .70×.70 =.49. So even if his method guesses right 70 percent of the time, only 49 percent of the time will he improve his position over the alternative of doing nothing. For this reason the odds are that a market timer’s efforts will simply make his portfolio more volatile without increasing his average returns. Even a skilled market timer will have difficulty beating the market.”
No comments:
Post a Comment