“Watching” the Market
May 04 2010
The way human nature overrides common sense is endlessly fascinating. This is particularly true when it comes to the illusion of control – how we believe we can control events that are actually beyond our capabilities.
A good example involves people who have an inordinate fear of flying. Few of these individuals are afraid of driving to the airport despite the fact that, statistically, riding in an automobile is far riskier than flying in a commercial airplane. There are a number of reasons for this phenomenon but at least one factor is the feeling that we are in control when driving an automobile. In an airplane we feel totally dependent on the pilot.
A similar and equally erroneous situation involves the investor who is “watching the market.” The presumption is that he is waiting for a signal that will reveal what should be done next. At the extreme, individuals stay glued to their computer screens observing every transaction and using sophisticated charting software to put each data point into perspective. The more time, effort, and tools involved in this exercise, the greater the feeling of control. But it is still an illusion.
The reasons are simple. First of all, while there may be some signal that marks a turning point in the market, those signals are only obvious in retrospect. Only hindsight can differentiate the correct indicators from the head-fakes and noise of everyday market activity.
The second reason is the inability of market data to forecast the future accurately. Countless man-years of effort and billions of dollars have been spent poring over historical data looking for patterns that might reliably predict future market activity. If anyone has ever found such a pattern they certainly aren’t going to share it with us. The fact is that once a trade is posted that data-point becomes the past and is of little use in telling us what we should do next.
The proof of this occurs when “the watcher” is asked, “exactly what are you looking for and what will you do when you see it?” The usual response is a quizzical look suggesting that this question has never been seriously considered. The logical conclusion is that while the observer may not know exactly what he is looking for, he feels confident that he (like the Supreme Court justice who couldn’t define obscenity) will “know it when he sees it.”
