Tuesday, October 21, 1997
The New Technical
by Selena Maranjian ([email protected])
A good Foolish investor will approach her study of an intriguing company by looking at both quantitative and qualitative factors. Among other things, she should review the enterprise's earnings history and potential, its balance sheet and other financial statements. In addition, it's also important to look over less-numerical things, like the firm's history, its industry, its competitors, its strategic position, the quality of its management, and so on.
Unfortunately, there exists a segment of the investor universe that focuses too closely on primarily quantitative data, basing its findings more on general investor psychology than on company-specific research. These are the technical analysts.
We Fools often chuckle at some of the weird antics of technicians. But it occurs to me that instead of merely refuting technical analysis, we might do well just to re-invent it. That's right -- perhaps we can make it disappear by affixing new meanings to the concepts it holds so dear. Below you'll find some new, Foolerized, Technical Analysis terms.
Accumulation: What Fools do with the stock of great companies. We find a great company, invest and hold. Then we find another. Until we have about 8-12 such gems in our portfolio.
Advance / Decline Line: This is the same old line that we trot out whenever someone recommends that we aggressively buy stocks on margin. Aggressive margin means taking a big "advance" from our broker, and it's a proposition that we "decline."
Ascending Trend Channel: While investors with short-term mindsets are glued to the TV or their computer monitors to see the latest stock price moves, Fools can afford to lazily channel-surf through their cable company's offerings. (Most Fools do so by moving from one channel to the next-highest channel, thereby exhibiting an ascending trend.)
Bear Trap: This is the sorry state of affairs when a market "bear" -- a pessimist who expects stocks to tumble shortly -- ends up missing on a nice market rally. No one can consistently and accurately predict short-term market moves, you know. All we know is that in the long-term, the stock market goes up.
Black Scholes: This refers to an oft-reminisced-about day many years ago, when a bunch of Fools took a field trip to the La Brea Tar Pits. There was much mucking around in tar and at the end of the day, upon examining the scholes of their schoes, Fools discovered them blackened.
Candlestick Charts: Candlestick charts shall become a metaphor for the time of reward, after a lengthy period of investment. In other words, if you've Foolishly bought and held great companies for many years and find yourself with a net worth north of what you ever expected, it might be time to take a little cash out to reward yourself. As you put some money down on a nice little retirement villa, your decorator is likely to ask you what kind of candlesticks you prefer, as she shows you a chart. (Go for the floppy velvet ones, with little bells.)
Chaikin Oscillation: This refers to Buddy Chaikin, a famous Foolish investor, and to the time in his life when he wasn't totally Foolish. He'd read TMF Templr's insightful letter to his father, explaining why historical mutual fund performances aren't to be relied on too much and be persuaded against mutual funds. Then he'd open some financial magazine, read about the 100 best mutual funds for 1998, and feel torn. He'd one day be compelled by the logic of Tom Gardner's Money-Heavy Portfolio (elaborated on in a letter to his mother), and the next find himself listening to a colleague's praises of technical analysis. Until he read more and planted his feet firmly on Foolish ground, Buddy underwent a lot of oscillation. As do we all.
Congestion Area: Congestion areas are places where Fools pack themselves in tightly, discussing the merits of various stocks and investment approaches. You guessed it -- these are our busiest message folders, listed weekly by TMF Bogey. Lately, they've included Drip investing, the CANSLIM approach, Intel, Iomega, Oil and Gas, Novell, 3Com, the Gaming Industry, Philip Morris, and the Dow Dividend Approach (alias Beating the Dow).
Consolidation: This is what happens as more and more people wander into Fooldom, and the forum grows stronger and sturdier.
Cup and Handle: Finding that the word "mug" is too easy to say, many Fools have begun saying "cup and handle."
Double Bottom / Double Top: This is one of the exciting new products that the folks at the FoolMart labs are working on: a pair of two-for-the-price-of-one pajamas.
Elliot Wave Theory: This is a controversial new theory, proposing that people named Elliot have a distinctive way of waving. Unfortunately, preliminary research is far from conclusive, as not enough Elliots have been found and studied. Another obstacle is the fact that many Elliots, when greeted, simply say "Hiya!" instead of waving.
Head and Shoulders Pattern: Fools try not to speak of this pattern, but it manifests itself as seemingly random white specks on a Fool's dark shirt. These tiny flecks of matter appear to come from the outer cranial region, settling on shoulders.
Pattern Breakouts: The market is up? Break out the flower-pattern china and let's celebrate! The market is down? Break out the geometric-pattern china and let's celebrate! No matter what happens today or tomorrow, that money that we've socked away in stocks (which we won't need for a few years, or ideally a lot longer) is well-situated. In the long-run, the market goes up -- a worthy cause for celebration. Break out the weird china pattern that features lumberjacks and blowtorches!
Resistance: Resistance to the Fool is futile! Unless, of course, you prefer not to look at the facts too closely. Facts like most mutual funds underperforming the market. Like many (but not all) stockbrokers churning your account -- buying and selling willy-nilly, generating commissions for themselves and lower returns for you. If you're willing to undertake a lot of reading, thinking and discussing, we hope you'll find it hard to resist the Fool.