Social media….the gift that just keeps on giving in terms of the idiocy it offers up to traders. It is hard to decide whether it is a wonderful entertainment value or whether it is profoundly depressing in terms of the idiocy that it generates. The latest piece of inanity comes from the notion of how to select which markets to trade. Let me state at the outset that market selection is much more important than individual stock selection – it is more important to spend time working out which markets are running rather than spending time trying to find individual stocks that might run.
This decision making hierarchy is about adding to your edge. There is the old saying thea all ships float on a rising tide and this is true – being in the right market at the right time is of paramount importance.
So how has social media brought us here?
A post on my Twitter feed last week claimed that to compare markets you simply generated a stacked graph such as the one below and looked at which appeared to be trending more.
In your investment process, you would simply eyeball these two charts and generate an opinion as to which one was trending more. This would serve as the basis for your decision making – this is wrong. The comparison of two indices or markets is based upon a relative performance comparison not a visual inspection of the chart.
As an example consider the chart below of the Dow and S&P500.
Based on a simple visual inspection you may assume that there is very little difference between them. Hence you really don’t need to worry about whether you invest in the Dow or the S&P500. However, comparing their relative performance offers a more nuanced picture.
So whether you are trying to decide which index to scan or which index ETF to buy – relative performance matters a lot. Certainly, it matters much more than trying to eyeball charts and make a wild guess.