On June 7th, 2007, I wrote a post entitled “A five minute market prediction“. In it, I wrote the following:
“As I mentioned in my previous post, now that I have the opportunity to actually invest a bit of money into the stock market, I am suddenly concerned about whether this is the right time to do it“
This was only about four months into my learning about the market. At that point, the market was flying high. The Dow Jones had gone from 11,000 to 13,500 in about six months.
Now I didn’t know much about the market, but this seemed a little odd to me. So basically, it was normal to put, say, $100,000 into the market, and make $22,000 in a few months? Was this whole investing thing really that easy?
I couldn’t believe that, so I thought why not bring up a graph of the stock market for the past decade or so, and see if there had been similar gains in the past and look at what happened after. Turns out I had stumbled upon the massive field of technical analysis, which is using a system filled with terms like “marubozu” and “Bollinger Bands” that are used to give insight as to where a stock will move next.
Of course I didn’t know about any of those techniques yet, so I did something simpler: I looked for patterns in the graph. And this is what I found (this is the same graph I posted in 2007):
click for a large version
As you can see, I just circled all periods which looked similar to the graph of the past few months. Then I made a simple observation: Every single time there was a gain like we had just experienced, the market either stagnated, or dropped, for several months after.
If only I had listened to my own advice. Because as it turns out, the market stagnated for a few months, and then dropped … by 50%.
Am I a market timing genius? No. Did I just get lucky? Quite possibly. Do people ignore obvious signs of danger in the middle of market euphoria? Absolutely.
Of course, if I were to try to apply this approach in the future, there’d be a few problems. The biggest one being that while those gains to seem to signal temporary changes in the market, they don’t always represent a peak. So there’s had to be some way to know when to get back in.
Still, I can’t help but wonder what it would have been like if I had just listened to my instincts, and passed those feelings along to family and friends who were much more heavily invested.
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