This Time Really Is Different!

This Time Really Is Different!

How many times have you heard the phrase “This Time Is Different?” In the context of investing it usually means something fundamental has changed in the way capital markets operate. The implied consequence is that you can no longer rely on the way things worked in the past to make investment decisions about the future.

But were you ever able to do that in the first place?

There is a trading technique called technical analysis used by many investment aficionados. They believe that patterns seen in past trading activities and securities prices can be used to predict future price movements. Technicians use historical price charts to search for patterns to which they’ve given descriptive names such as head and shoulders or double top/bottom reversal. Their expectation is that such patterns will repeat themselves. They also calculate lines of support or resistance as indicators for when to buy or sell stocks.

It should be no surprise that that the concept of pattern recognition has so much appeal. Our ability to see patterns is one of the most basic learning techniques of the human brain. We apply it so often that there’s even a word to describe our tendency to see patterns in random data where there are none. It’s called apophenia. Could the patterns observed by technical analysts be nothing more than that?

In reality, publicly-traded markets don’t have memories. Every minute of every day buyers and sellers renegotiate prices for each and every available security. It makes no difference what Apple stock sold for yesterday. Or last week. Or even last year. What matters to investors right now is how they expect it to perform in the future. The price of a stock at any moment in time is the price that buyers and sellers of that stock agreed to at that moment. Why would past Apple trading patterns have any bearing on that? A year ago Apple’s profitability outlook was different. Investor sentiment was also a far cry from what it is today. Back then everyone was preoccupied with inflation. Today it’s banking and debt ceiling political brinkmanship. Even if some of the price movements happened to match, why would you expect the same price pattern from last year to play itself out in the same way this year?

There are statistical techniques that can be used to help with investment portfolio allocations and other investment decision making. But not to predict price changes, especially in the short term.

So the next time you hear someone in the investment world say “this time is different,” you can agree with them. When it comes to investing, every time is different!

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