How Charts Confuse People, and Why Investors Should Know Their Timeframe

What I am going to do is show you two charts. It will be an exercise in perception. And it will be quick.

What do you think of that chart? Would you buy at the levels it’s at right now?

I know a lot of people who see charts like this and think, “it looks daunting way up there.” Or, “why buy now up there when you could have bought way lower.” There’ no right or wrong answer here, however.

I often hear that price is truth. And that price does not lie. But by itself, without any other information to work with, it’s actually meaningless. It’s a vacuum of randomness. The chart above was just a 4-hour chart of Apple during late 2010. When you zoom-out from that period, the picture now looks like this:

The lesson here isn’t about when to sell or when to buy. Or even how long you should hold. You can swap in or out any chart you want in the above examples. You could even find one where the chart eventually goes to zero, and the lesson is still the same. You can’t let a single piece of information persuade your decision-making. More importantly, you can’t lose sight of your timeframe, and how that piece of information applies to it. Moves that happen throughout a day feel significant in that moment, but are nearly impossible to spot when plotted over several years.

When people search to see how their stocks are doing, price charts are one of the first things they see. I was recently talking to a friend about Amazon, and it had me thinking about how people look at its chart, and process their thoughts:

First, a 5-day chart

Then a 1-year chart

Lastly, Amazon since its IPO

I’m not sure what the name is for the kind of bias or heuristic we experience looking at stock charts in these steps. From my research, it seems to be somewhere in-between an anchoring bias (relying too heavily on one piece of information) or an availability heuristic (recalling emotional memories or charged memories over everything else and forgetting about the normal instances).

I find that a lot of people, including myself at times, see big upward sloping charts, and immediately think about the few instances where crashes followed such climbs. The most powerful memories are those of panic, and those memories are the first things we recall. For some reason, it’s who we are. Perhaps it helped our survival several hundred years ago when we were wandering the Earth as nomads. It would make sense that your chances of survival are better if you remember the worst situations first so you don’t repeat them ever again.

But what if, in 30 years, Amazon takes over the entire world, and this happens:

In markets, this is all part of the game. Some people still won’t invest because every upward sloping chart they see is confused with the crashes they remember like the Financial Crisis, and Bitcoin dropping from $20,000. Or some people still won’t sell their worst investment because a few weeks ago it actually had one big up day! I always think about the few times I watched one day of price action, and nearly sold everything. Price is just one piece of information. It can’t be looked at alone. It needs context. And it needs a timeframe.

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How Charts Confuse People, and Why Investors Should Know Their Timeframe was originally published in Luchini In The Air on Medium, where people are continuing the conversation by highlighting and responding to this story.