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Thursday, May 25, 2006
Charting
My wife and I tend to jump into things with a brief intensity and then moving onto something else. For a while we played in a pool league. At a later date we took up golf. Lately our interest has been the stock market.
At first I was nervous about this move until I had a realization: it isn't all that important that we actually do well. Any money we put into an investment is money we didn't spend, and very little of our spending goes toward anything one would call an asset. So if we invest $500 in a stock and it drops $80, I count us ahead $420. Of course, there is the excitement of compound interest that we would be missing out on, so I really do want us to have some success.
We could have put the money in a safe investment, like CDs or government bonds or something. That, however, would have given little entertainment, and we need some compensation for not spending the money on consumption.
I'm learning quite a bit too, both about markets and myself. Lets skip what I'm learning about markets and just talk about me. The first few weeks of our investing, I was watching the stock screen all day long. I know this is a bad idea, especially for someone who claims to be a long-term investor. (Actually, we don't have a choice; we have too little to invest to handle the commissions from frequent trading.) Still, it was just too mesmerizing, especially since early on we were slowly building some profit. Then the market dropped like a rock over the last two weeks, and "I'm a long-term investor" became a lot easier to say. Now I have cut down to checking 5 or 6 times a day, and sometimes not even that.
I learned too that I'm an impulse buyer and seller, or at least I am when I've been watching the stock screen all day. We had one stock that wasn't doing so well, even when the others were. I told myself that these drops, which were mostly small, didn't matter that much, given that I was still standing by my "thesis" on the stock. (Isn't that a fine figure of speech?) Well, the stock jumped up one day to slightly above what we had paid for it, and I sold it despite all of my best rationalizations. My wife, who was following the market on her computer, was a little surprised, but not unhappy, I think. On another occasion, we had carefully worked out an "entry point" on another stock, but I couldn't help myself and bought well before. It is good to know these things about myself.
I find that I am irrational in this endeavor in a way that I see other's being irrational quite often: I let hope overcome good judgment. This is the same mistake of the people who play the lottery and slot machines, and I thought myself above it, but I was wrong. There is something quite pleasant about acting out of hope, especially when the hope is misplaced. By acting irrationally I demonstrate my fidelity to my hope. How much misery has this sentiment brought to human beings?
I take pride only in still having good judgment to overcome. While I act irrationally, I don't think my judgment has become too clouded. I find amusing the grounds upon which people make comments about the market, even from the professionals. How can it be that we have the metaphor "Monday morning quarterbacking" when it is in this area that I notice the vice the most. I guess in this field nobody backs a loser, so everyone must give the continual impression of wisdom and success. Whatever you might think about Jim Cramer, the circus act on CNBC, you have to give him credit on this point, because he regularly confesses to being wrong on particular stocks.
What I find most amusing, however, is that the whole stock market is a self-fulfilling prophecy. Why, after all, does a share of stock have value? Many stocks pay no dividend and few pay enough to beat what you can get from the bank, so that doesn't seem like the primary basis of value. A share does represent partial ownership in a company, but how really do you value that?
The two basic approaches that I've discovered are fundamentals analysis and technical analysis. The first, which involves figuring out what companies have the best growth possibilities, seems like the sanest, except for the points I just made in the previous paragraph. The second, which involves looking at charts and trying to discern trends, seems to me more like casting stones than it does good business sense, yet many people swear by it, especially the frequent traders.
When reading people defending their own approach, I have discovered a striking pattern: people defend their own by showing how inane the other approach is. This is fine, I suppose, but what if they are all right, which is what I suspect? What then? How can I feel good about retirement knowing that it is based on this suspect scheme?
Rationally, I lean toward the fundamentals approach, because I figure a company that goes out of business is a bad investment, whatever the rationale for how the market functions. I have shown, however, an ability to set reason aside in this venture, and I might just do so again. My mother's grandfather and great-grandfather were astrologers. Maybe I should take up the old family practice, but with different charts.
Eddie 10:04 PM
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