Financial Times recently ran an article by John Train titled ‘The heresies and swamis that can hurt your portfolio’. In it Train states:
There are several heresies in the investment business that can harm you if you believe them. One is astrology. Probably almost no Financial Times reader will be troubled by that one, but you would be surprised how many readers of fashion magazines and the like give it attention. Another is technical analysis the idea that by studying the shape of the markets wiggly lines you can predict the future. Famous swamis have arisen, such as Joe Granville and James Dines whose pronouncements would move markets. Yet it has been only a matter of time before they crash and burn.
If he is talking predictive technical analysis I agree. If he is talking rective technical analysis – he is dead wrong. I paint this picture in my book “Trend Following”. Train also states:
Todays heresy which I find particularly annoying because it is so lazy intellectually is claiming that volatility equals risk. What rubbish! Risk is when a company goes belly-up, a currency goes against you, or a country turns sour, such as Cuba; that is, the possibility of permanent loss of capital which has nothing to do with inevitable fluctuations of the market. Here is an example. Suppose you like living in your house, hope to live in it for 20 years, and do not want to sell it. It will get more valuable over time, and is thus a good investment. But suppose you constantly priced it in a thin market, and one year it was up, and another down. Does that make it risky? No. As Buffett says, better a lumpy 14 per cent than a smooth 12 per cent.
I agree here – bumpy is reality and smooth is for dreamers not connected to the real world. Train then offers a conclusion which is problematic:
So what should you do? Buy a stock that, like your house, you know all about and would happily own at that price, in the absence of any market.
This is pie in the sky. Buy one stock? How do you “know” about it? At any price? His article is very odd. Some nice analogies and comments, then a conclusion that simply doesn’t pass the smell test.