Blind men story and market analysts

This is just a story to justify why we need technical analysis to guide us in the information overloaded world of share investment.

It goes like this:-

There is a group of five blind men all having the first encounter with an elephant. The first man touched the elephant trunk and thought that the elephant is like a snake. The second man touched the elephant's tail and thought that the elephant is just a jungle vine. The third man encountered the elephant's leg and thought that the elephant is a tree. The fourth raised his hand and touched the elephant's ear and thought that elephant is a huge fan. The fifth man grabbed the elephant's tusk and thought that the elephant is a huge polished rod. When they sat down together for lunch, they started to relate their encounter with an elephant. On learning that they had all encountered but a single elephant, they were puzzled how each of them could have such a different impression of the same animal just like market analysts disagreeing with each others even all are analysing the same stock at the same point of time.

Because market analysts are very much like the blind men analysing the elephant , they only see the part they are trained to see. As such, every analyst suffers from narrow field of vision and misses the forest after examining his tree. One will look at earnings and, finding rapid earnings growth, forecast that the stock will go up. Second analyst, found that the same stock is over-valued due to the low book value and that same stock will go down. The first analyst placed great emphasis on growth of earning and the second analyst is looking for stocks trading at big discount to book value. Perhaps another pair of analysts comes along. One like a stock that is traded at high dividend yield and recommended a buy while the other saw that this same stock is not retaining enough profit for future expansion so recommend a sell. And yet another analyst comes a long and reject all the opinions on the stock because he was worried of the high gearing of that stock.

From a pure technical analyst point of view looking at fundamental of the stock is a futile exercise as they may be opposing views on the same stock. So he believes that all factors are reflected in the chart of the stock. By looking at the trend, pattern formation and oscillators etc he hopes to see the forest and not just a tree. And from that wide view he plans to catch all the monkey (money) in the forest.

This justifies the use of technical analysis.

However, Warren Buffett is the guru in investment and if you wish to be like him click here.

Have a good day!