What Are YOU Looking At?!
- Derek Hernquist
- November 23rd, 2009
Traders & investors cannot avoid data. Some seek more and more, while others limit details to focus on the big picture. Whether you base your methods on technicals or fundamentals or sentiment, it is crucial to focus only on data that can help you. Reading articles about bubbles serves no purpose for the daytrader, just as articles about oscillators serve no purpose for a fundie who likes to do channel checks or read balance sheets.
How much data do we possibly need? As exampled here by Seth Godin, 5-9 data points is what we have the capability of processing at one time. I think we do ourselves a great disservice trying to go beyond this, as we then lose sight of the info that actually matters to our style and time frame. As I wrote here, the great ones in any field separate themselves by an ability to focus on the task at hand.
Trust me, I'm a huge believer in data...cold hard facts help take the emotional component out of our analysis. I've crunched every type of technical and fundamental data over the last 20 years, starting from the first S&P guide I ever picked up. Wow, I can buy Bank of Boston or Circle K for a P/E of only 2? Sweet, where do I sign? If P/E is a relevant data point, it's at best "necessary but not sufficient". Later as I found out about technicals... how about that 50 day moving average, huh? Again debatable, but clearly not sufficient for a complete strategy.
Bottom line, we need more than 1 filter but less than 10. We can't quantify the "proper" value, no matter the computing power we have. A few independently calculated filters is about right, and can immediately eliminate 90% of the investing universe. It's not about modeling, it's about finding ways to bring the relevant information to the into our consciousness at the expense of the irrelevant.
Learn what can hurt your processing skills, and eliminate it from your radar. My personal kryptonite is "Change on Day", so I took it off my screens. Sounds crazy, but how was it helping me? I have measures for identifying present strength and weakness that I consider more robust, and allow me to frame the input period in terms appropriate for my time frame. Other than not buying a down stock in an up tape and not shorting an up stock in a down tape, why allow my brain to fixate on the distance traveled since 4:00 yesterday? For me personally, it is the equivalent of a glowing reference letter from one's Mom...high(emotional)strength but low(credible)weight.
One of my favorite quotes is from Epictetus "No man is free who is not master of himself." Sure, a lifelong pursuit with no end, but we put ourselves at great disadvantage by not bringing the most efficient assembly of our skills each and every time we play. The variables are limitless if we let them be, so figure out where energy is wasted and cut it from your view. Better to process 5 pieces of data consistently than 25 inconsistently...at least we'll be able to identify whether it's the data that needs work or us.
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