The Market is a Voting Machine
In the short run, the market is a voting machine. But in the long run, it is a weighing machine.
Ben Graham
Since the market’s sudden upside reversal off the April low, I’ve fielded lots of questions recently along the lines of, “How can the market be going up if XYZ is still true?”
People have asked about tariff impacts, inflationary pressures, geopolitical risk, headline risk, volatility, and innumerable other things that arguably should be causing investors to go more risk-off right about now.
I usually respond with a version of John Maynard Keynes’ famous quote, “The market can stay irrational longer than you can remain solvent.”
Or in a weaker moment, perhaps I’ll share a simple, “The market doesn’t really care what you think.”
In the end, perhaps the best way of thinking about this is with Benjamin Graham’s quote at the top of today’s newsletter.
We often wonder with dismay why the market goes up when we see the evidence as predominately bearish, or drifts higher when there are obvious signs that the market should be pulling back.
What we have to remember is that the short-term movements in the markets are driven by emotion. It’s all about how investors react to the latest headline or earnings news or economic release. And people tend to react based on their emotional state.
If you’ve spent more than a couple minutes watching stocks trade on any given day, you can tell that it’s not rational behavior that is driving stock prices. It’s fear and greed, euphoria and panic, optimism and pessimism, all translated into the flickering ticks that form the charts that we analyze.
Herding is behavioral bias where investors group together in a particular position or thesis, not because of their rational analysis of the evidence, but rather because they want to feel like they're “in the know” with all the other investors.
I see my role as a technical analyst as threefold every trading day:
Identify trends. Where is the herd going?
Follow those trends. What tools can I use to lock in this trend as long as possible?
Anticipate when those trends are reversing. What will tell me that the herd is shifting.
It’s not an exact science. There’s plenty of art involved. And while strategists and money managers will openly tell you how well they’ve pinpointed major market turns and here’s how they did it, real life is a little more messy.
Inflection points are not always obvious. Sometimes the herd shifts before you think they should, and sometimes the herd remains in a position way longer than you think is reasonable.
Sometimes you’ll get it right. Other times you’ll be too early, or too late.
When you’re right, stay right. When you’re wrong, admit you’re wrong, and think about what you can do better the next time.
Mindless investors expect perfection, and get super confused as to why the market is not doing what they expect.
Mindful investors know the market is a voting machine, they know to follow the herd, and they have the humility to recognize when they’re wrong!
RR#6,
Dave
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Disclaimer: This blog is for educational purposes only and should not be construed as financial advice. The ideas and strategies should never be used without first assessing your own personal and financial situation, or without consulting a financial professional.
The author does not have a position in mentioned securities at the time of publication. Any opinions expressed herein are solely those of the author and do not in any way represent the views or opinions of any other person or entity.
