Investing in Optical Illusions

What do you see here?

Is it a collection of random black spots… or do you see the dalmatian?

We’re all hardwired to make sense of what’s in front of us. Without thinking about it our brains take in raw information, search for patterns, and interpret results almost instantly. When crossing the street this process works every time, but when we invest, our sight can lead us astray. There are all sorts of stock charts out there with mysterious-sounding names claiming to predict the next crisis however they’re no better than the optical illusion above. Since markets cannot be predicted, the only crisis is in the eye of the beholder.

Every year someone publishes a chart that compares the last number of months or years to 1929. The one below looks particularly scary. Can you guess when it was published? Almost all of these 1929 (or 1937 or 1987 or 2001 or 2007 or 20xx) patterns will be wrong. Eventually someone will get it right, but that’s just broken clock syndrome (even a broken clock is right twice a day). If investing was as easy as matching shapes, we’d have more toddlers taking an early retirement by now.

Here’s another example of investing in optical illusions. I’ve never heard of a “triple top” before, but I’m pretty sure a lot of companies look like a triple top right before they don’t. After all, it’s not called a triple top anymore if the price keeps going up -- then it’s called growth. If investing was as easy as drawing a straight line across three points, then rulers would be harder to find.

Chart source

The funny thing is I rarely see charts predicting we’re due for another 1982-2001 growth spurt. Most of the investment world’s optical illusions centre on fear, and that’s because fear grabs more attention… it sells. So the next time you see these illusions pop up in your inbox, please remember that life does not always imitate art.

Finding valuable companies with strong return on equity, low volatility, positive trend, and a durable competitive advantage doesn’t require us to forecast markets or predict the future. It simply requires us to see what’s already in plain sight.    

Ben Kizemchuk is a Portfolio Manager & Investment Advisor with Altus Securities Inc. in Toronto. He offers financial planning and investment management for high net worth Canadian investors. Ben focuses on high quality investments, the Growth and Income Portfolios, low risk investing, and reducing tax.