Proof by image

This is always the big quarrel between the die-hards of technical analysis and the fundamentalists. The former swear that we can guess everything from the only variation of prices over time, via the graphs. The latter think on the contrary that we must analyze the figures of the companies to be able to guess the "right price" of a share. I used charts, moving averages, candlesticks, trend lines and other more exotic indicators for a very long time, with varying degrees of success. I would even say less... Finally I returned to fundamental analysis, while using a bit of technical analysis to confirm some of my choices.

What bothers me about charts is that it is very easy to make mistakes, to make appear what one would like to see. It is enough to take a certain angle of view for a selling signal to become a buying signal and vice versa.

Another problem with technical analysis is that there is a bias towards the trend. Everything encourages you to play in the same league as the others, to be a sheep. A bullish candlestick is green, a bearish candlestick is red. Implied: buy when it goes up, sell when it goes down... It's not really what you do when you go to the supermarket. I'm not saying it can't work if the timing is right. But we just have to not underestimate the weight of images on our little heads...

Finally, and most importantly, there is one last big problem with the charts, which I will illustrate in pictures below.

Here we have two stocks that are evolving in roughly the same way until the beginning of 2014. To the point HAS, the orange stock bounces on its bullish support, while the blue stock decides to evolve horizontally (in the jargon we say that it consolidates). At the point B, the blue stock breaks its support and begins to evolve on a negative trend. The orange stock after having continued its upward trend experienced a slight downward trend from the end of 2014, then it came to bounce on its support in C, before breaking its downward trend in D, to start rising again.

Very well, you will tell me, what is the problem? The graph clearly shows which of the two titles is a winner... Exactly. Except that it is the same title. It is about Dover (NYSE:DOV), once in USD (in blue) and once in CHF in Total Return, i.e. with dividends. Note that the decision to abandon the SNB floor rate had only a notable, but very short-lived, effect on the value in CHF of DOV (rebound of the orange curve on its support at point C).

By only focusing on the change in the USD price, like 99.99% of the planet, you would have sold, while the stock, in your currency, continued to make you money. The problem is that everywhere you look, the charts are given to you in the currency of the stock, not in yours. Now, what YOU it matters, that's what YOU win (or lose). And when you compare with stocks you own in your own currency, you're comparing apples and pears. Same goes for dividends. They historically make up half of stock market returns. Ignoring them is like booking a trip and only worrying about the plane and not the destination.

So, in the future, be careful with the weight of images...