Louise's Thoughts - Dinosaur Trading

Louise's Thoughts - Dinosaur Trading
In the year 2000, eminent scientists and National Geographic magazine, one of the world's most respected science journals, were duped by a fake Chinese fossil. For years there had been lively academic disputes that questioned whether modern day birds could have descended from dinosaurs. Finally, a unique little cross-section of a fossil with the wings and legs of a bird, but the tail of a dinosaur was located in China. It appeared to be the fabled missing link between dinosaurs and birds!

Everyone was ecstatic!
Because of the enormity of the find, National Geographic editors got carried away with the excitement, and ignored a small number of scientists who had presented conflicting evidence. Inconsistencies with the thickness of the rock in several places were ignored, amidst the overwhelming evidence that a half-bird, half-dinosaur had finally been found. The story was published to worldwide fanfare.

Fast forward a few months, and an amazing series of events lead to the second half of the fossil cross-section being found. Unfortunately, this provided proof that the original cross-section had been tampered with, calling the whole find into scientific question. Basically, two pieces of different animals had been broken up and then glued together. One looked more like a prehistoric bird showing a wing like structure, and the other that had more dinosaur-like characteristics of possessing a tail.

We can only imagine the initial elation felt by those involved at National Geographic when the fossil was analysed, and the subsequent disappointment and embarrassment after it was revealed as a fake. Makes you cringe, doesn’t it!

I wonder whether the scientists involved actually experienced some form of euphoric mass hysteria. The excitement of working on such a significant scientific finding must have been overwhelming. What a magnificent time it must have been for people more used to sifting through 10 tonnes of rubble only to find an empty coke can.

Even the most professional of us can be guilty of ignoring or over-looking pertinent evidence. Traders are renowned for over-estimating their performance and over-stating their trading results. As the Chinese fossil example shows, this tendency is hardly peculiar to our profession. Our own individual psychology can hamper our trading results, making even the most capable traders subject to the vagaries of fear, greed and ego.

During my preparations for a recent presentation on why charting tends to be effective, I got to thinking about the differences between fundamental and technical analysis.

Having spent quite a few years trading from a fundamental perspective, I found that it tended to produce ambiguous results. Sometimes, positive fundamental information such as higher than expected profits, would make the share price increase, but at other times, the share price declined immediately after the same type of announcement. Have a look at CBA for instance. On the 9th of August, CBA announced that it had achieved incredibly spectacular profits, far in excess of their previous expectations. However, on August 10th, the share price dropped 83 cents! What were people expecting?

After seeing example after example of this similar, confusing mass psychology, it occurred to me that if people reacted rationally 100% of the time, we could use fundamental data with ruthless precision. I realise that this may be hard to accept, but the problem is that people don’t behave in a rational manner.

As some quick questions to test your own level of irrationality:
Have you...

ever bought some clothes you only wore once?
ever bought a Ferrari, just because you turned 55 years old?
ever slept with the wrong person?
ever bought a share that was going down in price?
Obviously you don’t need to answer these questions out loud. I’m guessing the answers could be just plain embarrassing!

Rather than expect people to behave rationally, chartists tend to watch what people ‘do’ instead of what they ‘say’, and follow the herd that is creating a trend. The beauty of making your trading decisions based on a technical analysis springs from the chart’s brilliant ability to crystallise mass psychology. There is simply no better tool to determine the underlying emotion of the people trading that instrument. Perhaps if National Geographic could have developed a tool that charted the emotions of the scientists working on the dinosaur fossils, they would have realised that their emotions were blocking their capacity for rational thought. So, rather than breezing over any incongruities within the data, the editors would have delved more deeply into why these irregularities existed in the first place.

Ironically, the dinosaur story has one final twist. The two prehistoric halves that were glued together to create the fake dinosaur ended up each being unique finds in their own right. As luck would have it, although the composite creature itself wasn’t a real animal, the two creatures that went towards forming that animal provided indisputable proof that birds originated from dinosaurs!

Unfortunately trading isn’t that forgiving. If your trading account shows a debit, ripping up and re-gluing your broker’s statements won’t make it show a credit.