This was the subject line of an email that came into my inbox tonight and it’s something I’ve been thinking about for a while. No, not how to use MACD to perfection, but how investors think about signals and indicators.
A few weeks ago I was riding the subway, when after a minute or two of sitting at a station, on came the dreaded “we are delayed due to train traffic ahead of us.” The person sitting next to me let out an audible “ugggh.” I wasn’t surprised to hear the sound of frustration; after all, nobody prefers a longer commute. But what made me take notice was what sparked it. It wasn’t the two minutes of sitting at the platform, but rather the automated message, as if you need a signal to confirm the fact that you’re sitting still.
Searching for signals is part of what makes us human beings. We look for signals in people’s body language, we look for signals from god, and we definitely look for signals in the stock market.
The problem is we tend to overdo it. I mean, how many signals do we really need to tell us that the economy is expanding or contracting, or that stocks are going lower or higher? Looking for the signal behind the signal’s signal is fourth-order thinking at its dumbest.
We’re addicted to signals because they provide us with a scapegoat. They give us something to blame other than chance when we experience an adverse outcome. Heaven forbid we look in the mirror and accept that we made a bad decision or just experienced bad luck.
The email I got tonight is a great example of how dirtbags prey on an investor’s naivety. The truth is that indicators are just a derivative of price; they’re an elaborate way of turning something simple into something complex. Indicators can’t be used to perfection because they don’t actually indicate anything about the future any more than a magic eight ball does.
This should all be stating the obvious, but based on the number of these emails I receive, apparently they’re great at providing false hope.
Michael Batnick is a managing partner at Ritholtz Wealth Management. He is the co-host of Animal Spirits, What Are Your Thoughts, and The Compound and Friends. For disclosure information please see here.
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