<<Why in God's name would you want to remove "judgement" from your decision process?>>
I know I didn't express myself clearly, so let me try again. First of all, the ability to make good judgements is extremely important. But IMO judgement is used to best effect in identifying good companies to invest in, and is of relatively little value in determining a good entry point. In the words of Philip Fisher "it is often easier to tell what will happen to the price of a stock than how much time will elapse before it happens". For example, the decision to buy and hold Microsoft or Intel in the late 80's was much more important than the actual entry point. There are some who feel that a strategy which identifies superior companies, buys them regardless of price, and holds them for the long term will significantly outperform the market. They're probably right, but I feel that this strategy can be improved on by adding a dose of contrarianism.
The fact is that even the best of companies have bad years and occasionally fall out of favor. Buying these companies when everyone else hates them can produce exceptional results. And if you know you're buying an excellent company while everyone else is avoiding it, what more do you need to know?. Let's take as an example one of my favorite companies, Applied Materials. Unless you feel the entire semiconducter industry is entering a death spiral how can this stock fail to be a buy right now? The charts may look lousy, indeed we could see the price drop another 40% or even more, but odds are that this investment will perform admirably well over the next 5 to 10 years. (And if you do think the industry is on its last legs, why would you want to touch this stock no matter how good the charts look?)
Another contrarian investment approach which can produce good results is to find a mechanical method which identifies out of favor stocks and then use that method rigorously. This is what I was referring to in my previous post. An example would be Michael O'Higgins Beating The Dow. Once again, judgement should be used carefully when selecting a strategy, but will almost certainly be damaging if used to "improve" on the strategy once you've selected it. There have been many studies done which document this. A glaring example is O'Higgins himself, who announced in 1996 that the entire stock market was overpriced and put all his clients in cash.
As I said originally, I'm very skeptical of the claims made for TA and have seen no evidence that it produces better overall results. Indeed I've seen some evidence to the contrary. I certainly could be wrong about this, and I know that many on this thread feel differently. But if y'all disagree with me that would make me a contrarian wouldn't it? ;-)
FWIW,
Mark |
