"Conviction in analysis is critical. Position sizing will allow you to sit patiently through the pull backs. Every good stock pulls back on multiple occasions. But most people head for the doorway at the first sign of trouble. Learn to deal with it. Don't get shaken out. Having one good year is fun but having a great decade is a lot better. If you want to grow wealth, you must understand that money is made in the sitting, not in the trading." - Random tweet on Twitter
Tasseography is the divine art of reading patterns in tea leaves. People believe that energy is transmitted through the tea leaves during the process and the resulting arrangement gives us insights of our past, present and future.
Technical analysis is somewhat like tasseography, at least in my opinion. A lot of sentiments and 'energy' are embedded in the financial markets. There are possibly at least ten major events taking place in the world at any point of time, which are likely to move the markets. Some are speculative, some are anticipated, some are premeditated.
It is basically chaos theory at work. A complex system at heart.
I do not believe in charts.
I also have zero appreciation and understanding for the creative lines constructed by chartists and punters.
I once sat in a course on technical analysis many years ago. It was intriguing and captivating. Something about the way the overlays on the candlesticks is being explained and how it nicely fits into share price trends really convinces you that with the right observations and tools, you can try to predict those stock drops and spikes.
But since I have never had much luck with stocks and charts, it probably means I suck at it or am just a very lousy investor.
But in times like these, I can't help but take a step back and re-look at the bigger trends that have taken place over the last two decades, which is best observed through charts.
This is the DJIA from 2002 to 2005.
The end of 2002 was when the full impact of SARS was felt in the market. The market probably pre-empted some of that effect a couple of months before, Within approximately 12 months, stock prices had reverted back to its pre-crisis levels. One can argue that the spread of the virus at that point of time was somewhat limited by a relatively moderate travel activity globally.
And it didn't stop there. The next 5 years that followed saw one of the longest bull runs ever.
Was it that the impact from SARS was less pronounced as compared to COVID-19? Was it the release of pent-up demand from consumers 2002-2003? Was it the onset of globalization and the opening up of China, one of the world's largest economies, to the rest of the world?
Then the worst thing happened in 2008. In September, Bear Stearns, who had heavily dealt in the securitization of assets and liabilities, was stripped and offered as a sacrifice to one of the largest banks in the US, while Lehman Brothers was taken out in the streets and shot in the head. Yet again within about two years, the DJIA had once again recovered to pre GFC levels, with the intervention of the central banks through QE and the moderation of aggressive risk-taking by the consolidation of pure investment banks into commercial banks.
In the seven years that followed, saw once again, the best bull market the world had ever seen.
And this is us today. Not quite pre-COVID levels based on end 2019, not that far behind.
We have come a long way. The world today as compared to 2003 is very different - globalization, connected-ness, lifestyles, China, the iPhone and Zoom calls. Were we able to foresee back then in 2003 and 2008 how the markets would have turned out? How is that different today?
To analyze a "complex" system of an infinitely large number of moving parts (that we have almost no control of), we sometimes need to step back from the action and make the decisions based on the big picture. Stocks go up and down all the time. Volatility is the norm. But if you believe in the mean reversion to normalization, the long-term trend is still bullish.
So few investors / punters do due diligence on the companies they invest in. Many people jump too quickly into the bandwagon because they believe that the large and reputable investors have got it figured out. They think that if the big wigs are there, "something must be right" or they must have access to proprietary information that led to their decision.
"They must see something in there that we don't"
These funds have several hundred investments across hundreds of millions of dollars. If one investment goes south, they rely on the rest to keep the entire portfolio afloat. Are you diversified enough that way to take the risk?
The next time you put your money into something, think again - is FOMO driving you? Are you absolutely sure about what you are getting yourself into?