It’s easy to get caught up in all the noise that is the countless number of gauges investors use to measure the markets. What investors forget amidst the mental circus that comes of deep market analysis is that it is NEVER the indicator or data that matter. The only matter of any substance is how the market reacts to that indicator or data.
I am reminded of this daily recently as I see seemingly smart market participants clinging onto data points that lost their relevancy weeks or months ago. It’s like that guy you see walking down the street with long, bleached blond hair, netted gloves, leather pants and a Motley Crue T-Shirt. You can see that he is clinging on for dear life to the 1980′s as that was the only period that worked for him. He doesn’t realize that it doesn’t, hasn’t and won’t work again. Move on.
It doesn’t matter the gauge. I have seen investors cling onto valuation measures such as P/E ratios, various gauges of cash flow and relative value comparisons as fervently as the guys who cling onto technical measures that have stopped working. Value traps are built off of investors who can’t let go of the fact that while their ratios say the stock is a buy, the market is not in the mood to pay attention. When the market isn’t in the mood to pay attention, what you consider brilliant analysis is no better than using the mating patterns of Tibetan Antelopes to gauge whether a stock is a buy or sell.
What is worse than all are those who cling onto technical information that they gauge as being favorable to their position and simply can’t let go. What is dangerous about technical analysis to the average investor – who doesn’t have bullshit goggles that come with years of experience – is that technical’s are extremely subjective. You can twist around any technical indicator to say what you want, when you want. Therefore, if an indicator isn’t responding to the market, an investor can contort that indicator to correspond to his or her bias.
In the end the gauge you are using to determine your investment bias is only relevant if the market recognizes it as such. There is nothing in the markets playbook that says your particular brand of analysis must be respected. There is also nothing in the markets playbook that says your brand of analysis doesn’t open you up to the risk of ruin.
This is a subjective game that we play on a daily basis, with a dangerous and fickle opponent. Your ability to adjust is all you have. Your indicators, analysis and hundreds of books you have read ultimately mean nothing if the market is not in the mood to correspond. Your ability to adjust to that fact is what will determine if you are in this game 5, 10 or 15 years from now or if you end up playing checkers at the park with men who have lots of stories to tell and a pseudo-intellectual sense of entitlement.
Plan carefully. Adjust frequently.