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We all spend inordinate amounts of valuable time stressing over things we cannot control. This is especially true for investors. No matter how hard we try, we cannot control what the market does. The market will do what it wants to, when it wants to. Here at Mullooly Asset Management, we’ve found that technical analysis helps us focus on what we can control.
Security analysis generally gets broken down into two camps: fundamental and technical. Both have their merits and are important parts of any portfolio management strategy. Fundamental analysis looks at things like company management, product line, earnings quality, and price/earnings ratio. Technical analysis looks at price movement, market trends, and relative strength (or price momentum). We make use of both fundamental and technical analysis in our process at Mullooly Asset.
When it comes to technical analysis, we focus on point and figure charting. If you’ve never seen a point and figure chart, check out some of our posts and videos here on the site. These charts are comprised of columns of X’s and O’s. They allow us to track the supply-demand relationship of an investment. We can analyze stocks, sectors, asset classes, ETFs, mutual funds and more with these charts. The beauty of technical analysis is that it tunes out the distractions. The only thing reflected on a point and figure chart is price movement, and price is the only thing that matters when it comes to investment results. We’ve seen time and time again that great companies don’t always make great stocks. Point and figure charts objectively tell us what the market’s opinion of a stock is. You could invest in the best company in the world, but if their stock price continues to fall, that’s not an investment you want to be a part of. John Maynard Keynes put it well, saying, “Markets can remain irrational longer than you can remain solvent”.
How does technical analysis help us focus on what we can control?
First, let’s think about what we can control. We can control: the positions we hold in our portfolios, the amount we hold those positions in, our savings rate, and what type of accounts we invest in. We cannot control: politics, daily news, reactions to daily news, or stock market movements.
An excellent example of something we cannot possibly control is the current situation with Greece. Nobody knows how it will all play out; not me, not you, and not that guy on the TV who sounds like he knows what he’s talking about. We can all have opinions, but our opinions may be right or wrong. Whether we’re talking about Greece, interest rates, or whatever the market drama of the day is, the question often becomes: how will (insert headline of the day) affect my portfolio?
The proper answer is that we don’t know, but guess what? If market news breaks, and it affects our investments, we are going to see that reflected on our point and figure charts. We know precisely what investments make up our portfolios. We also have a clear, rules-based methodology that allows us to make unemotional investment decisions for our clients. When something no longer meets our investment criteria, we say goodbye. That is the game plan.
This is how technical analysis helps us tune out things we cannot control, so that we have more time to focus on what we can control.