Watch the Thing Itself

[The following is from p.1-2 of The Successful Investor - What 80 Million People Need to Know to Invest Profitably and Avoid Big Losses by William O'Neil (2004)]

What did the brokers, strategists, and economists do wrong? They relied purely on their own opinions of what the market would do. They also relied too much on their interpretation of the dozens of business and economic indicators they favor.

This approach rarely if ever works because the economy does not lead the market, the market leads the economy. That why wiser souls years ago included the S&P 500 index, a proxy for the general market, as one of the "leading" economic indicators released by the government each month and not a "coincidental" or "lagging" indicator. In short, the experts on Wall Street, by using the economy as a predictor of the stock market'rather than vice versa, had it all backward.

Another group of experts, called market technicians, follows 50 to 100 technical indicators such as advance-decline lines, sentiment gauges, and overbought-oversold measures. But in 45 years, I can't recall a technician picking both a market top and the eventual market bottom. At best, they're usually right one time and wrong the next. The reason is that the vast array of technical indicators they follow are secondary and far less accurate than the general market averages.

There's an important lesson here. To be highly accurate in any pursuit, you must carefully observe and analyze the object itself. If you want to know about tigers, watch tigers--not the weather, not the vegetation, not the other animals on the mountain.

Years ago, when Lou Brock set his mind to breaking baseball stolen base record, he had all the big-league pitchers photographed with high-speed film from the seats behind first base. Then he studied the film to learn what part of each pitcher's body moved first when he threw to first base. The pitcher was the object Brock was trying to beat, so it was the pitchers themselves he studied in great detail.

In the 2003 Super Bowl, the Tampa Bay Buccaneers were able to intercept five Oakland Raider passes by first studying and then concentrating on the eye movements and body language of Oakland's quarterback. They "read" where he was going to throw.

Christopher Columbus didn't accept the conventional wisdom about the earth being flat because he himself had observed ships at sea disappearing over the horizon in a way that told him otherwise. The government uses wiretaps, spy planes, unmanned drones, and satellite photos to observe and analyze the objects that could threaten our security. That's how we discovered Soviet missiles in Cuba.

It's the same with the stock market. To know which way it's going, you must observe and analyze the major general market indexes daily. Don't ever, ever ask anyone: 'What do you think the market's going to do?" Learn to accurately read what the market is actually doing daily as it is doing it.