If market timing is the single most heinous investment strategy to strategic, buy and hold investors, then technical market analysis must run a close second. Technical analysts study the market by looking at charts of market price under the assumption that the price already reflects all of the market’s information about a company or a market. The study of charts leads to an often baffling kind of analysis where serious investors are reduced to looking at pictures of price movements and then trying to discern what they mean. There are candlestick charts, point and figure charts, high-low close charts, and there are moving average charts and stochastics charts and moving average convergence divergence (know as MACD) charts. Technical analysts not only study these pictures trying to find price momentum and oversold and overbought market conditions, they often draw on them placing trend lines and support and resistance lines in a way that might amuse a preschool class given the proper tools of crayons and rulers. For the record, I am a strong believer in technical analysis because I believe that endogenous uncertainty, or the idea that investors themselves can be responsible for market misbehavior, is an important part of the process of finding good investment values.
It is somewhat ironic, however, that the only other group of investors that I’m aware of that believes that the price has such an important role in the investment process is strategic, buy and hold investors themselves. They believe that the price of a stock or the market is perfectly rational being determined by large groups of investors with perfect structural knowledge of the economy and perfect economic foresight in terms of how exogenous risk (the news) impacts markets. Therefore, strategic, buy and hold investors believe that the price always reflects fair value, a position that elevates price to a level of importance that is only equaled by…..technical analysts.
For all of the finger pointing and ridicule strategic investors hurl at technical investors, where they insist that technical analysis is pure quackery, the strategic buy and hold crowd should realize that they are closely related in their approach to how prices are set in the markets. All of which makes them strange bedfellows, indeed.
