Real estate magnate Richard LeFrac recently said, "If you're not confused, you're not thinking clearly". At first, I laughed when I heard that. Then, I realized how true his statement really is.
We are constantly bombarded with data, much of which is conflicting in nature. We must analyze and weigh all the data, and eventually, make a decision. Sometimes those decisions prove wrong. Hopefully, there will be more right decisions than wrong ones, or at least the right decisions will be more profitable, while the wrong ones will be small. I have found that this is the more frequent scenario -- small, frequent wrong decisions, and large, less frequent good decisions.
We are constantly bombarded with data, much of which is conflicting in nature. We must analyze and weigh all the data, and eventually, make a decision. Sometimes those decisions prove wrong. Hopefully, there will be more right decisions than wrong ones, or at least the right decisions will be more profitable, while the wrong ones will be small. I have found that this is the more frequent scenario -- small, frequent wrong decisions, and large, less frequent good decisions.
This is a time in which the investment world is experiencing great turmoil. The market can, and often does, turn on a dime. I have also noticed that tops and bottoms -- reversal points -- often occur precisely at the time that we least expect them. Reversals most frequently occur when market sentiment feels like a reversal is the least likely event . It often feels like a continuation of the existing trend is most likely, and yet a reversal at a top or bottom occurs instead. I have also noticed that following parabolic, sharp movements or trends, a sharp reversal is also more likely, as markets become grossly overbought or oversold, like a rubber band that snaps back sharply after being stretched too tight. In Philippe Cahen's book, Technical Analysis and Volatility, this is called the Australia pattern. I have no idea why. On the other hand, if a trend occurs on a more gradual basis, it typically will last longer and is more likely to end with a consolidation rather than a reversal.
I have come to expect market turmoil and uncertainty. Making decisions -- and investments -- in those times of uncertainty are often the best investments I've made. That's why I learned technical analysis. It allows me to make decisions based upon a set of indicators that permit me to remove most -- not all -- emotion from my investments.
