The Rational Investor #051: Announcement! And The Silliness of Technical Analysis
Happy Saturday to you,
Before I get to the 51st edition of The Rational Investor Newsletter, I want to share the announcement that I alluded to in my last 2024 Rational Investor newsletter.
Just so you know, this announcement is relevant ONLY to Financial Advisors. If you are not an FA (though 95% of you are), you can just skip straight down to this month’s newsletter. That said, here is the big announcement:
I have decided to cap my Client Memos membership!
For the full details, you can read “My Money Visuals Manifesto” that I published earlier this week. I truly believe most of you will enjoy reading it as I’ve gotten some incredible feedback from it, but the gist of the details are as follows:
I’ll be capping my membership at 500 total members OR wherever we stand on February 28th, whichever comes later. Despite this being a holiday week, I’ve already added 20 of the remaining 60 memberships that I note within the announcement itself, so I fully expect to close our membership by that deadline.
Regardless, time is of the essence.
If you’ve been on the fence about joining our Client Memos membership, now is the time, as there may not be another opportunity to join for the foreseeable future. If you already know you’d like to join, you can click here to be taken to our information page to join. I hope you see you there!
Now, back to our regularly scheduled programming…
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This week’s quote comes from the book The Money Game by ‘Adam Smith.’ I’ve really enjoyed reading this book as it’s filled with lots of great stories from the author’s life on Wall Street. Many of the stories are quite dated, as the book was originally published back in 1976, but the wisdom contained within is as relevant today as it was when this book was first published! One such example is today’s quote about technical analysis.
So, without further ado, here we go…
Here’s ‘Adam Smith’ on the Silliness of Technical Analysis:
“The Chartist has less material to report, and furthermore he does not have the Free Zone of the Long Term to escape into. His thesis is that past patterns tell future patterns; therefore he must say whether the market (a set of Averages) or a particular stock is going to go up or down, and it is very easy to check up on his prediction. So he must say something like this:
“We expect no furious advance unless the market is able to break through the overhanging resistance at the 920 level. Recent weakness in oils and strength in aerospace issues indicates leadership is rotating. Support exists at the 885 level, and unless that is pierced on some volume, we would expect it to hold near term. A trading range is indicated.”
In short, the market will not go up unless it goes up, nor will it go down unless it goes down, and it will stay the same unless it does either.
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Can the footprints of price movements really predict the future?
If truly and universally they could, they soon would not. When everyone knows something, then no one knows anything; the market would soon become too ‘efficient’; that is, the gap between present and future value would quickly be closed by the predicting advice.”
This last point is the best proof of the silliness of technical analysis…that is, if this stuff really worked, it would soon stop working. That’s ironic, but true.
As how could that not be the case? If it were accurate, everyone would abide by it, at which point, the market would soon become perfectly efficient nullifying its value.
That’s not to say that there is zero truth whatsoever in technical analysis given that momentum is a real thing in markets. Momentum, both positive and negative, is what causes bull markets to inevitably lead to euphoria and bear markets to inevitably lead to despair.
But, on the whole, these trading games are a loser’s game. As the math simply does not work over the long run. It cannot.
As for math, it is constantly on the side of the buy-and-hold investor. All of history shows this to be a smart decision to make, even if it is occasionally uncomfortable. It’s why we echo Churchill when we say that, “Buy and hold investing is the worst form of investing, except for all the others.”
That’s all for this week. Thanks for reading. I’ll be back next week with more timeless wisdom from great investors.
P.S. Once our membership cap is reached (or on February 28th) this newsletter will be defunct. I will, at that time, however, share a new project that I will be launching that is in the same spirit as this newsletter for those of you who wish to continue enjoying this type of content. But I will no longer be drawing any awareness whatsoever to Money Visuals from that point forward—as shared in my Manifesto—which means this email list will be deleted.
Whenever You’re Ready, Here Are 3 Ways I Can Help (For Financial Advisors Only):
If you’re interested in starting a client newsletter, I wrote an article on Michael Kitces's blog about the value of email newsletters and how you can do it effectively in your practice. Here’s a link to the article.
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