Forum Archive Index - November 2001

["nick" <helmett@xtra.co.nz>]

Money Matters: Charting tactics a game for losers

17.11.2001 By MARY HOLM

Q. I am a former money market dealer and am contacting you over what I consider an alarming trend among share market investors.

Since the September 11 attacks I have noticed, on the share market forums I belong to, many outwardly sane adults rushing to technical analysis, or charting, with an evangelistic zeal, helped along by a few irrational zealots of this method.

I am sure their aim is to make up recent losses, but am equally sure this method will lead to an impoverished retirement for the mainly baby-boomer group.

Of course, Warren Buffett doesn't use charts, but this fact does not deter its advocates.

As the great economist Ludwig von Mises said regarding economic forecasting: "If the future were merely a continuation of trends that prevailed in the past, it would not be uncertain, and we would not then be in need of any forecasting.

"However complete and recent statistical information may be, it always remains information about the past, and does not assert anything about the future."

Also, I noticed an advertisement for do-it-yourself foreign exchange trading. This has generated some interest ... Gads!!

A: There seems to be an inverse relationship between market performance and gullibility.

Whenever markets are falling, desperate people start believing in all sorts of magic. If wishing could make it so!

For those who don't know, technical analysis or charting is assessing where stock prices are likely to go, based on recent patterns in prices and other data on the company.

Chartists buy and sell shares on the strength of those forecasts, hoping to make big profits.

The analysis can get pretty complicated. These days, it's usually done by computer. And some companies sell programmes that do the number-crunching for you.

I doubt if many people can follow the calculations. I certainly couldn't when I went to one "seminar" - aka a sales pitch - to see what was going on.

But that didn't matter, the seminar presenters said. "All you need to know is that when this number is above this line, and that number is below that line, you should buy," or words to that effect.

They went on to tell us about impressive returns made by others who had used their programme.

Since then, I've heard of several people who bought in. None has made impressive returns over more than short periods; some have made pretty big losses.

And I must say I'm not surprised. Why should share prices follow any pattern?

Having said that, I have to admit that academics who used to dismiss charting now say that occasionally somebody comes up with a charting technique that seems to have a little merit.

It's never amounted to much, though. By the time you pay brokerage when you buy and sell the shares, and perhaps also tax on your capital gains, you would be losing, not winning. The same goes for foreign exchange trading.

Many have tried to make money doing it. Some have succeeded brilliantly - for a while. But very few professionals, and even fewer amateurs, have profited over more than a year or two, at most.

So you're best advised to sit quietly with what investments you've got. That's the only way to win in the long term.