12 Minute Read

Tales of a Technician: Anchors Away! Beware your Biases

January 13, 2016

By | 4 Comments

Tales of a Technician: Anchors Away! Beware your Biases

The older I get the more skeptical I become regarding financial forecasts. Most are clothed in sweet sounding statistics to sexify the pitch, make it more palatable for the little people to stomach. Unfortunately, data can be tortured until it tells you anything you want it to. Perhaps no one said it better than Mark Twain:

“There are three kinds of lies: lies, d*mned lies, and statistics.” (edited for the children)

Look no further than our current market for example. As we survey the past to see where the market has come from, where do most people’s eyes gravitate towards? I betcha it’s the March 2009 low, the infamous devil’s bottom.

Why?

Because it’s easy to spot, marks the termination of the last big bear market, and the genesis of the current bull market. And if that’s your starting point you can spin a pretty terrifying tale like: Oh Em Gee, the S&P 500’s ascension is going on its seventh year without a significant bear market. We’re so overdue for a crash. You’d have to be a nincompoop to buy stocks up here. What are you mad?

When you anchor on 2009 the market looks seriously lofty here. And with the great stock stall of 2015 the future looks ominous!

See, it’s easy to scare the children with the right starting point.

And yet, were I a money manager trying to get you to throw some more dough my way so I could increase my assets under management (not to mention my pay), I could switch out the lens you’re using to view stocks by switching the time frame. I came across a superb example of this the other day while sifting through my blog feed. Check out this trio of charts shared at The Reformed Broker:

The first shows how the past five years of returns for the S&P 500 was better than 66% of all other 5-year periods. Which is one way of emphasizing how strong the current bull market has been relative to past ones. If you’re a mean reversion fanatic this stat would support a more pessimistic view of the market since we’ve had it so good for so long.

5-year

And yet, if we change our perspective to the 10-year view, things don’t look so overheated. The 10-year compounded return is only 7.5% for the S&P 500 right now which is “lower than 70% of all periods.” Veterans would say the last decade has been somewhat blah. If past is prologue then better returns on the horizon. But wait, there’s more.

10-year

If you really want to giddy up the masses show them the following chart of 15-year total returns. By the way, “total returns” takes into account price appreciation plus dividends. The compounded return for the S&P 500 over the past 15 years (since 2000, basically) is a lousy 5.1%. And that’s even after the massive run we’ve seen these past few years. So how does the last 15-years rank among all 15 year periods? Lousy, lousy, and lousy. It’s lower than 88% of all periods. Shoot, through that lens, you have to be optimistic about the future returns. See, that’s the thing with mean reversion. Below average returns are virtually always followed by above average returns.

15-year

But here’s the rub. You must mind your time frame. 15-year total return averages shouldn’t really register to a short-term trader. It’s completely irrelevant. And yet, if you’re socking away money for retirement that you don’t want to actively manage, well, then the last chart should really warm you up to putting money to work here.

Switching out the lens by which we count market returns is an interesting example of anchoring. This per Wikipedia:

Anchoring … is a cognitive bias that describes the common human tendency to rely too heavily on the first piece of information offered (the “anchor”) when making decisions. During decision making, anchoring occurs when individuals use an initial piece of information to make subsequent judgments. Once an anchor is set, other judgments are made by adjusting away from that anchor, and there is a bias toward interpreting other information around the anchor.”

When forming expectations for future market returns, be aware of how anchoring can skew things. Sure, you have to begin to count market returns somewhere, but make sure you don’t make any certain starting point the end all-be all anchor. Just because the 2009 low carries heavy psychological significance doesn’t mean we have to measure all future returns against that level.


Tackle Trading: Financial Freedom is a Journey. Sign up now for a 15-day free trial.

Financial freedom is a journey

The Tales of a Technician series is brought to you by Tackle Trading.

Sign up now and gain unfettered access to all of the quality content and powerful Scouting Reports that our Pro Members enjoy for 15-days absolutely free with no strings attached and let us show you what your trading has been missing.

Sign up now for a 15-DAY FREE TRIAL #


Legal Disclaimer

Tackle Trading LLC (“Tackle Trading”) is providing this website and any related materials, including newsletters, blog posts, videos, social media postings and any other communications (collectively, the “Materials”) on an “as-is” basis. This means that although Tackle Trading strives to make the information accurate, thorough and current, neither Tackle Trading nor the author(s) of the Materials or the moderators guarantee or warrant the Materials or accept liability for any damage, loss or expense arising from the use of the Materials, whether based in tort, contract, or otherwise. Tackle Trading is providing the Materials for educational purposes only. We are not providing legal, accounting, or financial advisory services, and this is not a solicitation or recommendation to buy or sell any stocks, options, or other financial instruments or investments. Examples that address specific assets, stocks, options or other financial instrument transactions are for illustrative purposes only and are not intended to represent specific trades or transactions that we have conducted. In fact, for the purpose of illustration, we may use examples that are different from or contrary to transactions we have conducted or positions we hold. Furthermore, this website and any information or training herein are not intended as a solicitation for any future relationship, business or otherwise, between the users and the moderators. No express or implied warranties are being made with respect to these services and products. By using the Materials, each user agrees to indemnify and hold Tackle Trading harmless from all losses, expenses and costs, including reasonable attorneys’ fees, arising out of or resulting from user’s use of the Materials. In no event shall Tackle Trading or the author(s) or moderators be liable for any direct, special, consequential or incidental damages arising out of or related to the Materials. If this limitation on damages is not enforceable in some states, the total amount of Tackle Trading’s liability to the user or others shall not exceed the amount paid by the user for such Materials.

All investing and trading in the securities market involve a high degree of risk. Any decisions to place trades in the financial markets, including trading in stocks, options or other financial instruments, is a personal decision that should only be made after conducting thorough independent research, including a personal risk and financial assessment, and prior consultation with the user’s investment, legal, tax, and accounting advisers, to determine whether such trading or investment is appropriate for that user.

4 Replies to “Tales of a Technician: Anchors Away! Beware your Biases”

  1. KEITHGIUNTA KEITHGIUNTA says:

    Thought provoking. Thanks.

  2. Kitna Rhea Kitna Rhea says:

    Love your articles Tyler! Always informative and interesting. Thansk!

  3. Avatar DavidRoyar says:

    great read!!!!!!

  4. Tyler, I’m your fan.

Comments are closed.

Chart Modal

Tackle Trading