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Chart this! (10/12/2013)

Chart this! (10/12/2013)

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Roger Montgomery is the Founder and Chairman of Montgomery Investment Management. Roger has over three decades of experience in funds management and related activities, including equities analysis, equity and derivatives strategy, trading and stockbroking. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.

This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.

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15 Comments

  1. I love this video & the comments. I have a Chinese proverb/quote that was on my desk calendar a few years back that I always keep in mind.

    “Pluck a feather from every passing goose but follow no one absolutely”. It covers a lot of things in life besides investing & puts the onus back on yourself to take responsibility & in this case do your own research before committing.

    Thanks to all for their comments & have a happy & stress-free time over Christmas & the New Year.

  2. I haven’t watched the video yet so apologies if i am a bit off “chart”.

    My view that i have been thinking about is that charting has a use, except i don’t think i would ever use it for buy sell decisions. My interest is more macro. Using things like serial correlation as a method of quantifying the sentiment which i can then use with fundamentals to see how the markets view is diverging from what apepars to be reality. This can be used to see areas where there might be value due to companies being punished. For example, Aussie banks were pretty good during the GFC but were punished along with worldwide sentiment, you could then pick up CBA for $26.

    The issue i have with some form of technical analysis and other “momentum” investing i am not convinced yet that success using these methods is not simply a case of correlation not causation. There is obviously merit in that if you are early enough in and buy something that a lot of other people are buying then you should see a profit but at some point you will be the last one in and take a considerable loss.

    I was thinking about charting today on my bus trip. I have two buses that i can board to get to work, both have the same identical routes except bus one has a few extra stops. Bus two will come approximatley 2-5 minutes after bus 1.

    It is common to see numerous people over multiple stops let bus one go and wait for bus two to come. One hypothesis is that they think the extra time waiting will be compensated for time made up through less stops. There is however a very low probability that you will stop at these extra stops as they are not major ones.

    Instead what you now get on bus 1 is a comfortable, quiet ride on bus 1 and bus two being considerably busy. If i wait for bus two like the crowd and follow the momentum then i have a higher probability that i will get to work later than i did on bus 1 and also be forced to stand up/have to share my seat for my trip.

    I know there are some other theories as to why these people might wait for the second but the less stops on bus two is the most obvious and simple (and there for i think more correct) one.

    This to me is like charting and momentum investing. It can work, but you need to have the systems and processes in place to make sure you are one of the first bus stops and the closer you get to the end of the route the more likely you are to find yourself in an uncomfortable position. Unfortunatley you are up against thousands of traders and computer programs who are trying to do the exact same thing and might be better than you are.

    By focusing on value and fundamentals i am better able to control my own game which i think is important. I know the more i try to play someone elses game and predict what others are doing the more i am likelt to be at the op of the 8th but instead being bottom of the 9th (seeing Soros and Druckemiller got a mention).

  3. In one of your former lives didnt you trade a hang seng futures trading systen based off charting? pretty sure you did. so clearly you must have seen some value in charting / t.a.?

    cheers

  4. Roger, the evidence that technical analysis works is the fact that market legends such as George Soros, Stan Druckenmiller and Paul Tudor Jones use it with spectacular success. They use it in conjunction with fundamental analysis, unless they are undertaking short-term trades.

    Technical analysis forces an investor to accept they make mistakes and do something about it. This compares to fund managers who stubbornly hold onto to a stock on the basis that it is below their intrinsic valuation, whilst the market continues to punish it.

    That’s why we continue to see fund managers invest in things such as QBE and Qantas and destroy their investors’ capital. No technical analyst worth their salt would invest in such things, unless they were going short.

    Combining fundamental and technical gives you all the tools in the kit. If billionaire hedge fund managers use both, there is no reason for the rest of us not to do so.

    • Interesting that you think they use technical analysis. Perhaps visit to their websites and more recent interviews would provide some insights. I know my conversations with some of their employers and Jim Rogers didn’t leave me confined they were chartists. Don’t know any fundies that own Qantas but know a few that have generated extraordinarily consistent returns. Also don’t know of any academic papers suggesting TA works but plenty that shows combinations of fundamental/KPI business economic markers do.

  5. “There is no generally known method of chart reading that has been continuously successful for a long period of time. If it were known, it would be speedily adopted by numberless traders. This very following would bring its usefulness to an end.”

  6. Hi Roger, as one of the persons commenting last week, I hope my posts came across in the right spirit. My intention is constructive and to understand your position on this. Generally I’ve been in agreement with your views and never had the inclination to comment before, but was interested to understand why we are at difference here.

    While I will continue to use the support/resistance concepts to inform trade timing/execution, I respect your opinion to think and do otherwise. I also agree with some of your other points as I understood them (i.e. financial press should be read with caution; people hoping charts are the ticket to get rich quick are likely to meet with disaster; it’s easy to confuse skill with luck).

    Thanks for taking the time/effort to explain what you’re doing and provoke interesting debate.

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