Heresies and Swamis

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.

5 thoughts on “Heresies and Swamis

  1. My comment isn’t specific to this post, but more to the flavor of the content. I am an aspiring trader and have dedicated myself to the study of trading (I own Trend Following and thoroughly enjoyed it) and while I’m admittedly an amateur, I’m curious why so many traders, authors, teachers, etc are so quick to dismiss trading styles or methodologies that they themselves don’t use (such as predictive technical analysis in this case). As I journey through the endless information available to aspiring traders, one common theme I find is that there are ‘many ways to skin a cat’ so to speak.

    I’ve read all three Market Wizard books and it appears that each of the traders interviewed all had their own styles, methodologies, systems, etc that worked for them….some technical, some trend following, some fundamental. Why does one way of trading have to work to the exclusion of others? Can’t technical analysis coexist with trend following?

    Doesn’t Paul Tudor Jones utilize to some extent Elliot Wave? Didn’t Marty Schwartz use Terry laundry’s T-Theory? My comments are not meant to be critical, but more inquisitive….As an amateur who is aspiring, I like believing that there are multiple ways of trading successfully, each of them requiring high levels of commitment, dedication, and hard work, but all of them valid if the system or methodology fits you.

    I guess my question is….Do you really believe that predictive technical analysis has no value in general or are you personalizing the comment that it has no value for you?

    Thanks for all of your great work! I always look forward to reading.

  2. Prediction is impossible, forcasting is.

    To predict one studies the past and what happens after the past and cliams the future will repeat in a uniform distribution same as what happend in the past.

    To forecast is to list all the possibilities of what can happen and their probabilities over the long run, regardless of when they will happen.

    Then after we know the possibilities and their probabilities, we risk an appropriate amount of our equity so that when we are wrong we can still minimize our trading according to how much we lost, and if we are wrong we increase trading according to how much we profited.

    When we do this on the long run we will reach the correct probability that we found from researching the past, adjusting the position size will allow us to reach successfully with an upper edge.

    Patterns happen in the market, just like the law of large numbers and the central limit theorim, there are limits to how much the market moves in 1,5,10…. days, these limits exist and can be measured and aquire statistics from.

    When we track price movement on the long run we find that the possibilities begin converging to the mean, this is enhanced by diversifying, so the more we spread of trading the lower the volatility of the account and the faster the probabilities reach their correct mean against each other.

    Michael, I will send an excel file as an example, please attached it with this post if that is possible.

    Thank you

  3. Thomas Bulkowski has researched numerous technical analysis chart patterns, and although quite a few are no better than flipping a coin, some are statistically significant. A “high, tight flag” pattern has a 90% chance of reaching its price target:

    Do you have a problem with his methodology or some other objection to the validity of his statistics?

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