Investment Iron Law Ⅸ: Grasping the General Market Trend#
Basing investment decisions on technical analysis
often indicates a lack of experience.
In most cases, it won’t make you money.
The Blind Spots of Forecasting and Analysis#
The reason many investors engage in frequent short-term trading, besides being attracted by price fluctuations, is mainly due to the so-called “experts” who flood the investment market with constant analysis and forecasts, providing investors with specious advice. This leads investors to frantically chase the “buy low, sell high” principle. Let’s discuss whether forecasting and analysis are truly effective. Can they genuinely help investors make a fortune?
Is Technical Analysis Effective?
In April 1993, the Taiwan Economic Daily published an article titled, “Success in Stocks Depends on Entry and Exit Timing.” This led many to believe that the most crucial task in investment analysis is determining the right moments to buy and sell.
The average investor believes the golden rule for wealth in the stock market is “buy low, sell high.” They also believe the key to success lies in accurately grasping these timing opportunities. Consequently, countless investors try every means to predict future stock price trends to determine optimal buying and selling points. In their quest for the Midas touch, various methods, from the scientific to the absurd, and even the supernatural, such as astrology and market horoscopes, have emerged. Currently, the most widely used method is “technical analysis.”
In the author’s humble opinion, technical analysis’s popularity in the global investment market, and its continued prevalence among Taiwanese investors, stems from the fact that it appears sophisticated yet not overwhelmingly complex, thus attracting many novice investors. These beginners often believe they must possess some secret technique to navigate the stock market, leading them to prioritize learning technical analysis upon entering the market.
Technical analysis originated from the Dow Theory in the 1930s, after which various technical analysis methods sprung up like mushrooms. From the 1940s to the 1960s, technical analysis was highly popular in the US stock market. However, with the advent of the Random Walk Theory, and the observation that most users of technical analysis ended up worse off, its popularity began to wane. By the 1980s, when the author was studying investment analysis in the US stock market, established investment analysts rarely mentioned technical analysis. At the time, if an investor claimed to use technical analysis for investment decisions, it implied inexperience and a high probability of losing money.
Technical analysis involves studying and analyzing past price trends and volume data to determine buying and selling timings. Its fundamental assumption is that history repeats itself. Therefore, by identifying the patterns of stock price movements, one can accurately predict future trends.
Beating the Market is a Pipe Dream
Numerous empirical studies by scholars have revealed many problems and controversies surrounding technical analysis. Briefly summarized:
- Historical patterns don’t always repeat. Even if technical analysis has been effective for decades, it doesn’t guarantee future success.
- If a particular technical analysis method consistently succeeds, its widespread adoption will eliminate its potential profits.
- The collective actions of technical analysts can create price patterns. This means the price isn’t reflecting a correct prediction but rather the analysts’ actions.
- Some technical indicators rely on comparisons with past data. These values can change due to time and environment, making past standards inapplicable to the present.
If you were given a past stock chart and asked to devise a profitable investment strategy, everyone would understand “buy low, sell high.” Profiting from trading in such a scenario would be easy. However, investing is about the future. Future price movements are complex and unpredictable; no one possesses a future stock chart. So, is “buy low, sell high” still a suitable investment strategy? The answer is no. The reason is simple: no one can predict market highs and lows in advance.
Using previously successful technical analysis methods doesn’t guarantee future success in beating the market, as excess returns can be random. Furthermore, concluding that technical analysis is effective based on occasional or random excess returns is misleading. While technical analysis might yield short-term gains, it cannot consistently outperform the market in the long run.
A student once asked me, if the market follows a random walk and technical analysis is ineffective, why are some technical analysis methods accurate at times? Claiming technical analysis is ineffective means it can’t generate long-term excess profits, not that its predictions are always wrong. Technical analysis can sometimes be accurate, just like random guesses can be accurate. Therefore, technical analysis isn’t necessarily inaccurate; its accuracy is comparable to guessing.
The Trap of Short-Term Trading
Another significant drawback of technical analysis is that its methods focus on identifying buy and sell points. These points constantly emerge, forcing investors to frequently buy and sell, trapping them in short-term trading and eroding returns through transaction costs. The ineffectiveness of technical analysis means that, on average, it doesn’t generate excess returns over the long term. In other words, while sometimes accurate, it ultimately underperforms the market’s average return (buy-and-hold strategy).
You might have used technical analysis methods with seemingly good results. I admit some methods can be effective, but investors often overlook transaction costs. Considering these costs, returns from technical analysis are unlikely to be high. Furthermore, the effectiveness of any technical analysis method is inconsistent, making long-term high returns improbable.
Technical analysis exhausts investors, leading to significant losses. Investors should abandon it and adopt a long-term “buy-and-hold” strategy to benefit from long-term market growth. It’s crucial to understand that market risk is inherent in any investment strategy. Investors should be mentally prepared and avoid excessive optimism about short-term returns. Profitable investing relies on correctly judging the overall market direction. Obsessively seeking investment rules from past data, even if profitable, will likely incur time and effort costs exceeding the returns.
If you still believe technical analysis can lead to riches, ask yourself: who has become wealthy solely through technical analysis?
Blind faith in predictions is worse than no prediction at all. Prediction is more art than science.
The Only Certainty is Uncertainty#
The biggest mistake in investment strategies is overconfidence in prediction. If you’ve tirelessly searched for prediction methods without success, or your developed methods are unreliable and unprofitable, don’t be discouraged. All predictions face the same challenges.
Like you, forecasting experts cannot predict the future. If they possessed a crystal ball, they would be wealthy, not making a living from predictions. If this logic isn’t convincing, ask yourself: “Which self-made millionaire or consistently successful long-term investor has relied solely on prediction?” The answer is none.
Investment Performance is Unrelated to Predictive Ability
People often assume investment success hinges on predictive ability. Those who predict better supposedly perform better, while investment failures are attributed to poor prediction. However, this isn’t true. Most successful investors admit their inability to predict the future. They have no preconceived notions, and their success stems from sound strategies, not accurate predictions.
During my studies in the US, when I first dabbled in the US stock market, I shared the common belief that Wall Street analysts were remarkable and highly skilled at predicting market trends. After graduating from UC Berkeley in 1987, I left academia for a position at a major US brokerage firm, largely driven by the desire to learn from renowned analysts at Merrill Lynch.
At Merrill Lynch, I witnessed these analysts firsthand. After numerous interactions, I realized they couldn’t accurately predict future stock prices. Some didn’t even invest in stocks themselves. I often called analysts, asking which stocks to buy and when the market would rise. One analyst, perhaps tired of my persistent inquiries, frankly told me, “Think about it. If I knew which stocks would rise and when the market would go up, would I be stuck working as an analyst?” It was then I understood that analysts don’t possess predictive powers.
Upon returning to Taiwan, I observed that local newspapers and magazines were filled with “Expert Predictions” or “Analyst Market Forecasts.” I interacted with several well-known analysts, studying their predictions carefully. My conclusion: there were no superior predictions in the Taiwan stock market. These analysts and experts couldn’t accurately grasp the market’s future direction.
Analysts Rely on Hype
Why do so many analysts and experts constantly make predictions in the media? The reason is simple: supply follows demand. Readers crave these predictions, prompting newspapers and magazines to create dedicated columns. Experts often publish predictions not because they possess foresight but because readers believe experts have superior knowledge of the future and eagerly seek their opinions. Newspapers cater to this demand by soliciting expert articles. Similarly, why do brokerage firms employ so many analysts to interpret market trends for clients? To meet customer needs. In a competitive environment, analyst insights are considered a crucial service. Brokerage firms readily provide this service because research indicates that investors guided by experts tend towards short-term trading, generating higher commissions for the firms.
This demonstrates investors’ heavy reliance on expert predictions, which arise from investor demand. The problem is that the stock market is unpredictable. No one can make accurate predictions, a widely acknowledged fact. Yet, most investors still believe in expert forecasts.
A US poll once asked, “Who lies to the public the most?” The results: weather forecasters, stock analysts, and economic commentators. This reveals not that expert predictions are always inaccurate but the public’s unwavering faith in them, leading to heightened expectations. These professions often require making future predictions under the assumption that “experts must be able to predict; those who can’t predict aren’t experts.” This pressure compels many researchers and analysts to publish future predictions, despite the inherent uncertainty. Being wrong is inevitable, and being perceived as liars arises from the public’s initial belief in their predictions, leading to feelings of deception when they prove incorrect.
You might question this, citing instances of analysts who made remarkably accurate predictions, causing stocks to surge upon their recommendations. However, have you noticed that these seemingly prophetic “experts” are rarely the same person and often disappear after a while? In reality, these experts, unless backed by market manipulators who profit from deceiving retail investors, are simply experiencing probability at play. Occasional streaks of accuracy are possible but not sustainable.
Strategies to Lure Retail Investors
Market manipulators aiming to pump and dump a stock, besides securing cooperation from major shareholders, must create a forecasting “expert” who, through media appearances, convinces retail investors to buy in. As major shareholders lock up their shares and more investors join, it creates the illusion that the “expert’s” predictions are coming true, causing the stock price to surge.
Joseph Granville was a popular technical analyst in the early 1980s. His remarkably accurate market predictions in the late 1970s made him famous. His large following gave him considerable market influence; his words could move the market by tens of points. However, in early 1982, he predicted a major market crash, advising his followers to sell all their stocks. Instead, the market surged from around 700 to over 1200 points within five months. Those who heeded his advice missed a significant bull market, and Granville faded into obscurity.
I advise investors to avoid stocks being manipulated. Even if you make small profits initially, one loss could wipe out all gains and more. Another reason: manipulated stocks involve major shareholder intervention. These shareholders, instead of focusing on business operations and profits, are interested in quick gains through market manipulation, indicating poor management. Such companies aren’t worth investing in. Their scheme relies on retail investors’ money; retail investors have little chance of winning. If retail investors could profit from this game, what would be the point for the major shareholders?
Another possibility for accurate predictions is simply probability. Predictions are often diverse and contradictory, with some bullish, some bearish, and some expecting consolidation. Inevitably, someone will be right, purely due to luck or higher guessing probability.
More Wrong Guesses Than Right
However, most people don’t think this way. When experts make several consecutive correct predictions, they gain credibility and are hailed as “prophets.” People easily forget past incorrect predictions, treating the “prophet’s” words as gospel. This is extremely dangerous. Investors overlook the possibility of future incorrect predictions.
I’m not entirely dismissing analysts and experts. In the unpredictable investment world, many investors need expert guidance. Analyst data and forecasts can be valuable reference material. My point is, regardless of your attitude towards expert predictions, remember: the future is dynamic and unpredictable. Investment risk is an unavoidable reality and must be managed.
In early 1990, as the market peaked, most experts predicted continued growth. A prominent “market prophet” confidently proclaimed the market would reach 15,000 points within six months and 20,000 within a year. Major media outlets reported this prediction. The reality was starkly different. Within six months, the market plummeted 2,000 points, shocking all experts. Did these experts disappear? No. Newspapers and magazines still feature expert market forecasts. The reason is simple: investors are “used to” hearing these predictions and many remain captivated by them.
I don’t advocate completely ignoring predictions. Predictions have value, and good predictions are worth considering. However, whether you believe in predictions or not, and regardless of the predictor’s reputation, remember: the future is fluid and unpredictable. Investment risk is an inherent part of investing and must be managed.
You don’t need predictive abilities to invest well or make money in the market. In this complex and volatile market, the only certainty is uncertainty. In the investment world, profits come from choosing the right investments and holding them long-term, not from predicting market movements. In summary, consider expert predictions, but remember they are just predictions. Don’t blindly trust them.
There are no experts in the stock market, only winners and losers.
Trust Yourself, Not the Experts#
Some believe that lacking professional expertise makes achieving wealth through investment incredibly difficult. Yet, many who don’t understand stocks or real estate still achieve financial success through investing. Most successful investors aren’t investment professionals, and investment professionals aren’t necessarily successful investors. This shows that expertise isn’t a prerequisite for wealth creation through investment.
Investment and financial management aren’t inherently complex. The perceived complexity and reliance on experts stem from investors’ inability to cope with uncertainty, overcomplicating simple matters and turning financial management into a source of anxiety and confusion. This anxiety hinders rational decision-making, leading people to constantly seek external opinions.
10 Experts, 11 Opinions
The inability to handle uncertainty creates the illusion that foresight or profound analytical skills are necessary for successful investing, leading to the belief that only “experts” can manage finances effectively. Consequently, many entrust their financial decisions to experts, who often offer conflicting “expert opinions.” Ten experts can have eleven different views, further complicating the investment world and adding to investor confusion.
Basing your financial decisions solely on expert opinions is extremely dangerous. Ultimately, investment responsibility lies with the individual. Investors should enhance their financial literacy and become their own experts. Financial management doesn’t require extensive professional knowledge. By following a few basic principles outlined in this book and acting accordingly, you can achieve wealth without relying on experts. With the right investment philosophy, you might even outperform them.
Therefore, I urge investors to take immediate action, start investing, and stop asking questions like “When will the market rise?” “Which stock should I buy?” or “Should I sell my xxx stock now?” These questions are pointless; no one knows the correct answers.
In 1983, when I began my doctoral studies at UC Berkeley, I started helping Taiwanese entrepreneurs invest in US stocks. To excel at this, I dedicated immense effort to stock analysis, often neglecting sleep and meals. For one to two years, I practically lived in the Berkeley Haas School of Business library, devouring every investment book and analyzing all available stock information. I learned various technical, fundamental, and market analysis techniques. To develop my unique investment analysis and prediction methods, I utilized Berkeley’s advanced computers and extensive stock databases, writing programs to simulate various investment approaches. This proved futile; I couldn’t find a satisfactory method. It was all for naught.
If anyone truly knew when the market would rise or which stock to buy, they would be wealthy enough not to need a job as an analyst or expert. I reiterate: even without knowing “when the market will rise” or “which stock to buy,” you can still achieve wealth through investing. Stop wasting time on these questions. Countless people have dedicated their lives to researching them since the inception of the stock market. They became stock experts but didn’t achieve wealth through investing.
Inaction and Effortless Gains
Financial management doesn’t require excessive time. Those who spend less time on it often perform better.
Statistics show that Taiwanese stock investors spend an average of 3.12 hours daily on stock analysis and market watching. Is stock picking difficult? Is making money in the stock market challenging? Constantly chasing price fluctuations, what are your returns? Those who diligently study stocks often lose the most money.
A common investor mistake is giving up. They eagerly enter during bull markets and become disheartened during bear markets, abandoning the market entirely. Lacking patience and perseverance, they rarely succeed. Conversely, those with less financial acumen, admitting their inability to time the market, often persevere and ultimately fare better.
The path to investment wealth is simple: effortless gains. The investment strategy presented—“buy any stock, buy anytime, don’t sell”—can be summarized as “do nothing, gain effortlessly.”
Who wouldn’t want effortless gains? Surprisingly, most investors can’t achieve this. “There’s no such thing as a free lunch” is a widely known principle. Applying this to investment, people assume they must master complex techniques and work harder than others to profit. Intuitively, they believe more knowledge and effort equate to higher returns. This might hold true in other areas, but in finance, the opposite is often true. Knowledge and effort don’t significantly contribute to investment returns. Knowing more and constantly monitoring the market encourages impulsive trading, leading to “effort without gain.”
Inaction is Superior to Action
Even investment gurus like Warren Buffett and Peter Lynch admit they can’t predict market movements. Admitting ignorance might seem foolish, but it’s the beginning of financial wisdom. Being “foolish” enough to “buy any stock, buy anytime, don’t sell” is the starting point of wealth creation. Confucius said, “Great wisdom appears foolish.” This refers to highly learned individuals who achieve mastery through natural means, without contrivance or cunning. They appear unintelligent but are truly wise. Lao Tzu also said, “Great skill appears clumsy,” and advocated for “governing by non-interference.” This strategy, applied to the volatile investment environment, is a sound approach. Unless you have strong conviction about future trends, it’s better to ignore the chaos and remain inactive.
Therefore, you don’t need to be an investment expert or possess sophisticated techniques. “Do nothing, gain effortlessly” is the key to financial wealth. You might think this sounds too simple, even boring. Indeed, it is. But this simplicity is the path to riches and becoming a millionaire. Before acting, ask yourself: “Do I want wealth or to be a stock market expert?” If you want wealth through stocks, emulate the many who became rich by simply investing and then ignoring the market. Decades later, compounding will make you wealthy. You could also dedicate yourself to becoming a stock market expert, but this rarely leads to riches.
My point is, even without knowing “when the market will rise” or “which stock to buy,” you can still achieve wealth through investing. Short-term market fluctuations are unpredictable, but the long-term trend is upward. Long-term investing is the key to profit.
“Buy any stock, buy anytime, don’t sell”—so simple, effortless, and seemingly undeserved. While it feels like unearned gain, don’t feel guilty. Investing in stocks contributes to economic development. Constant trading harms individual wealth and offers no benefit to the overall economy or society.
Easier Said Than Done
Some worry and ask, “You advise against saving money in banks. If your book becomes a bestseller and this idea spreads, wouldn’t it cause a nationwide bank run?” This is an unnecessary concern. I’ve been advocating against saving money in banks for three years, even before this book’s publication. Many who hear this idea nod in agreement, as if enlightened, yet days, months, or years later, their money remains untouched in bank accounts.
Others question whether my “buy any stock, buy anytime, don’t sell” theory, if widely adopted, would force brokerage firms to close, depriving the government of transaction taxes. Again, there’s no need for such concerns. Those who frequently engage in short-term trading in stocks, futures, or margin accounts, even after understanding that it only benefits intermediaries, often can’t resist continuing their behavior. Like gambling, everyone knows the odds are stacked against them, yet gambling persists.
I understand that “don’t save money in banks,” “avoid short-term trading,” and “diversify and hold long-term,” are simple in theory but difficult in practice. Nevertheless, I sincerely hope readers can integrate knowledge and action, diversifying most of their assets into stocks and real estate, holding them long-term. Achieving financial freedom is within reach.