"It is always better to drink a wine a year too soon than a day too late." -Paul Gregutt
Specifically, he discussed the methodical way in which sommeliers evaluate a wine during a tasting to the methodical way that a technical analyst reviews the weight of the evidence when analyzing a price chart.
I've often compared analyzing a price chart to doing a preflight checklist for an airplane. Even after years of flying, you still check everything on that list before every flight. In a Cessna 172R, that means a spiral bound laminated book and you go through each item visually. More sophisticated planes have electronic displays that allow you to confirm each item is checked.
I read the Checklist Manifesto years ago and I remember being struck by the simplicity yet importance of making a checklist. The author included examples from medicine, construction, and of course, aviation.
In flying, checklists really come up all the time, not just during preflight.
For example (and I am reciting these from memory, so any CFI's in the audience, please don't judge):
During an engine cutout:
1) Airspeed 65 knots
2) Fuel shutoff valve in
3) Mixture rich
4) Fuel selector valve to Both
5) Check ignition
And then the standard emergency procedure:
1) AVIATE- fly the plane!
2) NAVIGATE- where am I?
3) COMMUNICATE- hey, here's my situation!
The key with both of the above scenarios is that the checklist is meant to kick in without thinking. The moment the engine cuts out, you automatically do a "figure 7" on the control panel to check all of those items. During an emergency, the checklist reminds you that in a situation when your emotions would normally be elevated, priority one is to fly the airplane.
What's the common thread between these three activities- analyzing charts, tasting wine and flying a plane? Three things come to mind.
1. A systematic approach.
There's a specific order and method to these checklists. There's a logic to how you prepare a plane for flight, and there's a reason for every item on that list. My somewhat cynical mentor Greg Morris, a former Top Gun instructor and career airline pilot (also an incredibly knowledgeable investor) always said that there's an accident that led to every one of those items being added to the list.
Most importantly, there's a reason for every item on that list, and you skip absolutely none of them.
2. A consistent application.
Every time you taste wine, you're meant to follow the same "deductive tasting" method. Every time. Not sometimes. Not just when you feel like it. Every. Time. That means that if you analyze the same wine months apart, you ideally come to the same conclusion.
I've seen many amateur chart readers drawing spurious conclusions from minimal effort. Or cherry picking evidence to justify a position. That's not what we want.
3. An emotionless evaluation.
I've spent years studying investor psychology, and I'm thrilled when I find ways to allow you to minimize the impact of behavioral biases on investment decisions. If you look at the Court of Master Sommelier's Deductive Tasting Format, or the Cessna 172 emergency procedures, or a good technical analyst's process, you'll find one thing that is absent is emotion.
For investing, I've always started my checklist with Dow Theory. Is the stock in an uptrend or downtrend? That is, do we see higher highs and higher lows, or lower highs and lower lows? All of the rest of my analysis should build on that starting point.
I hope to explore many of these themes further in the coming months. In the meantime, I hope your charts go up and to the right, you enjoy the fruits of the vine, and you keep the blue side up!
Disclaimer: This blog is for educational purposes only, and should not be construed as financial advice. Please see the Disclaimer page for full details.