“Reality leaves a lot to the imagination” – John Lennon

Do you remember those visual 3D puzzles popular back in the nineties? You had to look into the middle distance, or cross your eyes to find the hidden image. Apparently, our subconscious decodes the differences in repeating patterns. Our brains are hardwired to rearrange things so that we see order and shapes that in reality, are not there. It also pushes the “red button” when we see something that doesn’t look right.

“Kerning ”, a word which I recently discovered while reading an article on typesetting  , is the process of arranging the spacing between letters, and is a perfect example. Getting this right is vital. We have two people in the office who can identify where spacing is inconsistent, even by a fraction. Names are being withheld to protect the innocent.

Research suggests we are predisposed to see order in patterns and shapes which goes some way to explain “Chartism”. There are many technical analysts or chartists who believe there are patterns of price movements discernible in stock market charts. Perhaps markets repeat themselves? Maybe it’s automatic response to market stimulus, a form of market muscle memory? For the record, decades of academic research suggests markets are devoid of emotions, memories or muscles.

When asked if it was possible to see patterns in investment charts, Warren Buffett had a one-word answer. No. His reasoning was brutally straightforward, “I realised that technical analysis didn’t work when I turned the chart upside down and didn’t get a different answer.”

So, with all due respect to Mr Buffett’s opinion, is it possible to spot patterns and trends in short-term market movements? Dr Andrea Barbon, assistant professor of finance at the University   of St Gallen in Switzerland, who teaches mathematical modelling is even more dismissive. “I have friends who have started trading. They call me and ask for advice. And they are really quite expert in these charts. They are trying to extrapolate the future from what happened in the past. But it’s nonsense. It’s just emotional.”

Despite this, Chartism is popular. It comes complete with its own language. Terms like “saucer bases, double and diamond bottoms, pullbacks, levels, head and shoulders”. All descriptions of the trends that apparently appear in market price movement charts.

So, the question is this. What credible evidence exists that markets do exhibit behavioural patterns that can be consistently identified and tracked? The answer is none.

David Booth, Chairperson at Dimensional Fund Advisers our principle investment partner recently wrote, “You don’t need to believe in magic or be able to predict the future to have a good investment experience. Some people might think I’m giving the market too much credit. But over more than 50 years in finance I’ve come to realize that I’m just being realistic. Someone described it to me as “science-based hope.”

He goes on to say, “So don’t try to outguess markets — go with them. Come up with a plan, take no more risk than you can tolerate, and go spend some time with your loved ones.”

We happen to agree.

As William Osler said, “We are here to add to life, not to take what we can from it.”