Technical analysis, a study of supply and demand with charts as the primary tool, might seem to offer the answer to the question that most of investors want to know – where is the price of the particular investment going to be in the future, preferably in the very near future. If only we could predict these price movements, we could act upon them and get rich beyond our wildest dreams. So instead of looking at particular investments and determining if they make economic sense, technicians choose to focus solely on supply and demand. In other words, they study what everyone else is doing by using tools such as moving averages, leading and lagging indicators, volume, support and resistance. As long as they see buyers coming into the market, they will buy because they hope that the new demand will push prices higher. When they see strong selling pressure, they will sell simply because everyone else is selling.
To me, this kind of stuff never made any sense, and maybe this is because I like to think that I have my own brain and can think for myself. Wouldn’t it be logical to study a particular investment, whether it is a publicly traded company or a piece of income-producing property, and determine whether it is a good business selling at a reasonable price despite what everyone else is doing? To me it would, but that’s not how the majority of investors think. They are so focused on price and how the behavior of other investors affects that price that they simply ignore what is underneath the ticker symbols. In early 2009, I studied Tech Resources (TCK, Financial) when it was trading for around $3 per share. There were investors who scrutinized all the technical indicators trying to predict the company’s future price. I ignored it all. The only thing that mattered to me was that the price of this stock was way below what I thought it was worth, and I bought it for $3.33 per share. I did not care if the next day it dropped to $2 per share simply because other investors wanted to sell, putting downward pressure on the price of the stock. Investors who were waiting for the moving averages or other indicators to align properly missed out big time because the stock is trading for $40 per share today. Did it really matter if you paid $3.33, $5.00 or even $10.00 per share for this stock? I don’t think so.
Technical analysis tells you only one thing – what other investors chose to do in the past. It doesn’t tell you anything about what they will do in the future, but even if it did, then buying or selling investments simply because others are doing it without thinking for yourself is just a dumb investment strategy. Would you tell your children to do drugs just because their friends are doing them and that drugs must be good for people simply because everyone is taking them? I wouldn’t think so. Then why would you use technical analysis to tell you what others did in the past with the hope of finding out what they will do in the near future? Determining whether something is a good investment is not the job of your computer, nor of the host of your favorite investment show, nor of your follow investors. It is your job.
To me, this kind of stuff never made any sense, and maybe this is because I like to think that I have my own brain and can think for myself. Wouldn’t it be logical to study a particular investment, whether it is a publicly traded company or a piece of income-producing property, and determine whether it is a good business selling at a reasonable price despite what everyone else is doing? To me it would, but that’s not how the majority of investors think. They are so focused on price and how the behavior of other investors affects that price that they simply ignore what is underneath the ticker symbols. In early 2009, I studied Tech Resources (TCK, Financial) when it was trading for around $3 per share. There were investors who scrutinized all the technical indicators trying to predict the company’s future price. I ignored it all. The only thing that mattered to me was that the price of this stock was way below what I thought it was worth, and I bought it for $3.33 per share. I did not care if the next day it dropped to $2 per share simply because other investors wanted to sell, putting downward pressure on the price of the stock. Investors who were waiting for the moving averages or other indicators to align properly missed out big time because the stock is trading for $40 per share today. Did it really matter if you paid $3.33, $5.00 or even $10.00 per share for this stock? I don’t think so.
Technical analysis tells you only one thing – what other investors chose to do in the past. It doesn’t tell you anything about what they will do in the future, but even if it did, then buying or selling investments simply because others are doing it without thinking for yourself is just a dumb investment strategy. Would you tell your children to do drugs just because their friends are doing them and that drugs must be good for people simply because everyone is taking them? I wouldn’t think so. Then why would you use technical analysis to tell you what others did in the past with the hope of finding out what they will do in the near future? Determining whether something is a good investment is not the job of your computer, nor of the host of your favorite investment show, nor of your follow investors. It is your job.
