Jason Zweig once made a key observation during an interview with Russ Roberts (via The Irrelevant Investor):
I think if there’s one overriding theme to the book, one of the things I’ve tried to get across in The Devil’s Financial Dictionary is the importance of just being humble before the financial markets. I mean people are humble before nature- think about when you stand on the rim of the Grand Canyon, or you walk to the edge of the ocean, or you look up at the stars, people feel this sense of awe and wonder and smallness because we are small when we compare ourselves with the natural world. Well individuals, and for that matter, policy makers, are small when we compare ourselves with the financial markets, but most of us forget that. And we think, oh we’ll we have better data or we know something the other guy doesn’t, and in fact we should have that same sense of just being a spec of sand on a long beach and just remember that whatever we know is very small compared to the totality of the information that’s out there.
This begs the question, what is your edge as a financial advisor? If your edge is “knowing something the other guy doesn’t” how realistic is that edge? So much of what goes on in the investment management business is centered around people believing that they have insight into why a given security is mispriced. Taking Zweig’s advice to stay humble as it relates to the totality of the information that is out there goes to the essence of technical analysis. For technicians, and specifically those adhering to a trend following/relative strength-based approach to investing, our edge has nothing to do with identifying mispriced securities. The prices are what they are—the simple intersection of supply and demand. Our edge is having a disciplined method of identifying and participating in the strongest trends in the market. Thanks to the power of technology, our trend following models see and incorporate all information in the market that is relevant to our buy and sell signals.