technical analysis

No Free Lunch

© Can Stock Photo / 279photo

From time to time, we meet people who are devoted to avoiding the worst selloffs in the market. When there are so many simple statistical tools available to keep track of the trend, they say, it makes no sense to stay in the market when the trend is against you.

For example, by selling out when the major stock market indices dip below their 200 day moving averages, and buying back only when they climb back above, one could have avoided significant damage in the worst downturns.

The problem is, one could also have avoided some really sharp recoveries from low levels. And in any lengthy test of these mechanical rules, generally they would have cost money to implement.

The key question is, what fraction of your total returns would you be willing to give up in order to get a smoother ride along the way? Would it be OK to have 30% less money after twenty years? 20% less? 40% less?

Our point is, there is a cost to the human preference for stability. There is no free lunch. The trend-following systems that save you from damage also tend to water down your results over the long term.

We believe we get paid to endure volatility. Living with the ups and downs when so few are willing to do it…that’s what we do. We seek to understand what fraction of your money can be invested for the long term, without regard to volatility—and invest for you on that basis.

The markets have had volatile spells, but year by year results have been positive since 2009 in the major averages1. We know that sooner or later, unpleasant times are going to come around.

Our principles may hope to offer some cover from overvalued markets. Avoiding stampedes and seeking the best bargains may or may not limit the damage—we have a mixed record, and no guarantees. With the uncertainties of the markets, and the impossibility of knowing the future, it is comforting to have principles by which to operate.

Clients, if you would like to talk about this or anything else, please email us or call.

1Standard & Poor’s 500 Index, S&P Dow Jones Indices. Retrieved May 21st, 2018.


The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.

The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.

All investing involves risk including loss of principal.

Can Haruspication Work For You?

© Can Stock Photo / DAIVI

We’re fairly certain we will meet one of our communication goals with this essay: to educate. We did not know the big word in the title until we went looking for it. If you knew it already, you are some kind of scholar.

Haruspication is one of many ways in which humans have attempted to divine the future. The practice came to ancient Rome from the Hittites via the Etruscans. It involved examining the entrails of animals that had been sacrificed to the gods for signs and portents. Perhaps it didn’t work that well, since the Hittites and the Etruscans haven’t been heard from for millennia.

In our day, technical analysts purport to be able to learn the future direction of investments by examining charts of various kinds. At the extreme, some say that fundamentals like earnings or financial statements or economic factors do not apply: everything one needs is supposed to be in the charts.

Our view is that facts matter, that understanding financial statements is important to investment analysis, that economic research has its place. By far the most important thing is to choose the questions you want to answer.

For a long term investor, the direction of the stock market or of any particular investment next week or next month or even next year is not all that pertinent. We already know that markets and investments go up and down; we also know what the underlying long term trend has been for many decades.

The questions we most want to answer are, where are the biggest bargains in today’s environment? Are there market stampedes we should avoid, or perhaps even go against? How can we own durable sources of investment income so we can live on our capital?

Neither haruspication nor technical chart analysis is likely to help you reach your goals. You may rely on us to do the work of reviewing quarterly reports, analyzing financial statements, studying economic developments, and thinking about trends in business and society—so that we can help you answer the important questions.

Please call if you would like to discuss your situation, and how our work might apply to it.


The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

No strategy assures success or protects against loss.