No one can ignore price movements

Or, as Josh Brown states it, “Everyone is a Closet Technician.”

Everyone is a closet technician. Everyone. And in a panic or a market correction, this truism is even more, um, truistic.

First, what is a technician? Here’s my own handy definition, I think you’ll like it: A technician is someone who cuts right to the chase and studies actual prices and behavior instead of puzzling over the causes of prices and behavior like everyone else.

It happens each time and it is always hilarious. They’ll deny it: “The market is wrong” or “these are mispriced securities.”

The technician is one step ahead: “The market is not wrong, it has a current set of collective beliefs that are subject to change. Price will tell us when there is a likelihood that this change is at hand.”

Let’s get back to the “Why?” question and the fact that technicians don’t waste their time with it.

There’s a cognitive foible common to human beings known as the Hindsight Bias. As investors, there’s nothing we like to do more than looking back at an event that’s just taken place and reciting the reasons for what caused it as though they were obvious to us in advance. “I knew it all along! It was China, Greece, the Fed, that magazine cover, Obama, the rate hike.”

This is even more true of clients who are subject to the daily reporting of ONLY the S&P and Dow levels, and results in career risk for the investment professional.  “Why isn’t my account going up as much as the S&P?”  Because you have a diversified portfolio, which contains some portion of the S&P, and will sometimes do better and sometimes worse.  And when the S&P is beating everything, your diversified portfolio will always be doing worse.  But the responsible professional cannot recommend only the S&P just because this is the safest for keeping a client happy.  The client’s immediate happiness is not the goal:  his/her long term financial security is.

The trick, then, is educating the clients to understand that market movements are part of the process, and diversification is a feature, not a bug.

 

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