It pays to keep an open mind
Sydney Morning Herald
Saturday August 15, 2009
There's a paragraph in the introduction to Benjamin Graham's bible, The Intelligent Investor (first published 1949) that declares in reference to technical analysis and trading that €śWe do not hesitate to declare that this approach is as fallacious as it is popular.€ťIn 1949 Graham erected a wall between traders and investors, and since then everyone has had to choose one or the other.At one extreme are long-term investors ploughing money into the market on fundamental judgments they somewhat arrogantly declare will persist for eternity, negating the need to pay any attention at all ever again (no wonder it's popular), and at the other extreme are the hardcore traders who wouldn't know cabbages from BHP, and don't have to as long as there is a volume number, an open, close, high and low price to plug into their technical-based trading system (no wonder it's popular).So which is best? Trading or investing?Trading first. One of the great advantages of trading is that you can €śdo it yourself€ť. Technical analysis and the techniques of trading are now a commodity and very accessible, and because of that it suits the majority who want to sit at home and trade online. You don't need a broker; you don't have to have a €śrelationship€ť; you have independence. Just you, your software, a trading platform and your brain. A fantastic game.The other great beauty of trading and technical analysis is its honesty in that it does not presume to predict the future. Its mantra is simply to enter trades that have a high probability of succeeding and when the trade goes wrong there is no faffing about, no debate, no questioning, no analysis and no blame, just a closed trade. Getting it wrong is expected in trading; it is not a matter of €śpride€ť.But it's not all roses. There are a few problems with trading:ťŹ Before you gain €śthe edge€ť you will need a time-consuming education.ťŹ To do it properly is almost a full-time job.ťŹ You will have to navigate a minefield of trading seminars, product promises and paraphernalia designed to convince you that you can fly. Enough to get you to jump off a cliff anyway (a few grand lighter, of course).ťŹ And finally, before you can embark on the crusade let me tell you that without time and interest you will not stay the course, and it is more likely you'll have to be put down at the third hurdle.That aside, the good news is that a $35 book is all you need to invest in to find out whether you are interested and for those of you who are the rest of the education is fantastic, relentlessly stimulating and your results are oh so easily measured.And for those of you who are investors and inclined to spurn trading it may interest you to know that, contrary to popular belief, trading is not necessarily short term and that traders set out to do exactly the same thing as the long-term investor €“ to buy a stock that goes up forever and if it does they too will hold onto it. The difference is that they will take action when it falls over.So what about investing?Well, for all its pitfalls (like trying to ignore a devastating bear market) the truth is that fundamental analysis is the ultimate driver of share prices and that without fundamental investors and their knowledge share prices wouldn't turn and trend and technical analysis couldn't exist. By definition the people who know the fundamentals are the first to buy and the first to sell. There is more money in fundamentals if you are right, if you know.The difference is that whereas technical analysis is a commodity and is accessible, fundamentals and the knowledge they impart are not, they are hard won and protected and exploited by the few who have it. Which is why those without access to it dismiss it and why those who want access to it use brokers.The bottom line: within the knowledge of fundamentals and the timing and discipline of trading lies nirvana, and unlike Graham you should accept bits of both and dismiss neither.
© 2009 Sydney Morning Herald