Images in the Clouds

It is a feature of human psychology that we seek patterns where there are none.  The more whimsical among us express this tendency by seeing images, such as animals, in the clouds.  This poses no real problems as a way to waste away a summer day, but it can be a major detriment to your trading strategy when you see patterns in stocks that are not there.  The art of technical analysis depends heavily on knowing and recognizing patterns in stock price charts.

If you want to read a full-blown attack on this idea, I refer you to professor Malkiel’s book.  I take a more tempered view of technical analysis, suggesting that it has merits, but the chances of misinterpretation are quite high, especially for the novice.  In the world of long-term investing that is the focus of this book, technical analysis has no place.  The technical aspects of such portfolios mean risk assessment, which involves inspecting the correlations of many assets and determining your portfolio allocation based on your personal risk tolerance.

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