Kass: There Is No Secret Sauce
By Doug Kass 10/04/12 - 12:00 PM EDT
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This column originally appeared on Real Money Pro at 7:48 a.m. EDT on Oct. 3.
NEW YORK (Real Money) -- Earlier this week, a fellow Real Money Pro contributor and I went back and forth on the merits of technical analysis. Let me start by saying that there is no secret investment sauce or elixir that will deliver traders and investors a recipe for investment success. There is no quick answer to capture the holy grail of investment results -- not in charts, algorithms or historical patterns or pattern-recognition formulas. On the latter point, Jim "El Capitan" Cramer appropriately and roundly criticized pattern-recognition observations on "Mad Money" Tuesday night -- he called them worthless, incorrectly authoritative, a pernicious and a lazy exercise that serves as nothing more than a "lovey blanket" (i.e., a piece of cloth that makes you secure but provides, in reality, little security). And I agree strongly with Jim. But I understand why many want to believe. Taken by themselves, charts, algorithms and/or historical patterns provide a veneer of authenticity in just the sort of easy and quick sound bite conclusion toward which traders and investors are drawn. I frequently see blind faith in the effectiveness in some of these exercises, and, frankly, it concerns me. These approaches (and others) provide an attempt to simplify an awfully complex investment mosaic. Similar to Jim's "lovey blanket," they provide a false sense of security. Investment selection is not as simple as interpreting a chart (through technical analysis); it is a complicated combination of macroeconomic factors, the level of interest rates, individual stock analysis, sentiment, valuation and many other variables. Technical analysis, in particular, should be used in conjunction with the above, not as a means unto itself. Again, there is no secret sauce in analyzing a stock's price chart -- a chart simply tells us where a stock has been, not where it is going. Though I am a fundamentalist, I am not attempting to say that the answer is found either through fundamental or technical analysis. I utilize and incorporate valuation, sentiment, macroeconomic factors, interest rates and many other instruments in my investment process, but fundamental research is the foundation of all my decisions.