The Ignorant Investor

I'm going on vacation this week and won't be able to post. Before I go, I'd like to point anyone who reads this blog to Barry Ritholtz's recent interview for TheStreet.com of Paul Lowry, a well known market technician. For those who aren't familiar with his work, Ritholtz is a hedge fund manager and the currently bearish author of "The Big Picture," an excellent blog that looks at big, macro-sized issues surrounding investing and the economy.

I don't believe in technical analysis and side with guys like Burton Malkiel and others who see it as something of a pseudoscience akin to phrenology. That many market professionals believe in technical analysis doesn't bother me at all. In the 19th century, phrenology (i.e., judging character by the shape and topography of the surface of the human head) was widely accepted by intelligent people as a perfectly valid tool for hiring employees and choosing a mate. We find it bizarre, but the practice could not have continued as long as it did if it did not sound plausible at the time.

Today it's no different with technicians in the investing world, who - lacking the ability to know the future- look to the past behavior of the stock market to determine patterns that repeat themselves in predictable ways. Faced with millions of dollars riding on bets made on the outcome of a future that no one can know, most traders latch on to the technicians' wealth of data, special terminology, and certainty like shipwrecked sailors tossed a rope from a passing ship. They almost have to believe in it.

Isaac Asimov outlined the situation well in reference to scientists problems in warning the public against a host of "miracle cures" and other forms of hucksterism years ago in the Skeptical Inquirer: "Inspect every piece of pseudoscience and you will find a security blanket, a thumb to suck, a skirt to hold. What have we to offer in exchange? Uncertainty! Insecurity!" So that's my view of technical analysis: it's a big warm blanket for the congenitally nervous.

Maybe I'm being unfair, and no doubt the technicians don't care about my opinion of them (for one thing, they're much better paid than I am). Maybe time will prove me wrong, and in the 22nd century investors will view someone like me the way we view phrenologists today, i.e., a symptom of early 21st century stupidity. In any case, part of the investment discipline I'm trying to follow these days requires occasionally listening to the other side of questions on which I've already made up my mind.

Lowry is described by Ritholz as one of the top technicians out there, and he doesn't seem like a crank or make incredible promises for what technical analysis can do. I'm going to read it again over my vacation and post more on what he says, but for now, the two-part interview is available here:

www.thestreet.com/markets/marketfeatures/10269345.html

and here:

www.thestreet.com/_tscrmb/markets/marketfeatures/10269355.html