David Keller – It’s OK to be Wrong, It’s not OK to Stay Wrong

David Keller, CMT, is president and chief strategist at Sierra Alpha Research LLC, a boutique investment research firm focused on managing risk through market awareness, and author of the blog, Market Misbehavior. David calls himself a right-brained person in a left-brained industry and prides himself on his ability to bridge the gap between academic and practical finance. He is past president of the Chartered Market Technician Association, and most recently served as a subject matter expert for Behavioral Finance. David was formerly a managing director of research at Fidelity Investments in Boston as well as a technical analysis specialist for Bloomberg in New York. At Sierra Alpha, David combines the strengths of technical analysis, behavioral finance, and data visualization to identify investment opportunities for active investors and enrich relationships between advisors and clients. He uses his blog to teach readers about investing through metaphors, most frequently paralleling the process to aviation and flying. The blog platform also provides him the opportunity to make observations on market psychology. On top of this, David is a featured contributor on StockCharts.com, where he authors The Mindful Investor column, and on the See It Market platform for “smart, unbiased financial minds”.   David is also a published author; his articles have appeared in Bloomberg Markets magazine and he edited the book, Breakthroughs in Technical Analysis: New Thinking from the World’s Top Minds (Bloomberg Press). His talents took him to Waltham, Massachusetts, where he was an adjunct professor for three years at Brandeis University International Business School. David has a bachelor of science degree in psychology and a bachelor of arts degree in music from The Ohio State University.    “One of the reasons we fall into a lot of behavioral challenges or poor decision making as analysts is because you are programmed to do just that … pound the table, put your foot down and insist that you have the right answer … to be completely fair, probably almost half the time you do not have the right answer.”  David Keller    Worst investment ever  Markets begin to recover after bottom of 2009  In mid-2008, David left New York to work for Fidelity Investments in Boston and what followed was a very difficult first year on the job from a market point of view. The market topped out in late 2007 while a lot of stocks topped out in early 2007. Then 2008 started a little weaker. It then continued its sell-off into autumn on that year. The market bottomed out at the beginning of 2009. His March, April and May was very confusing and there was a great deal of volatility at the low points. Through 2010, 2011 and 2012, market start to recover consistently, with some surprises along the way. People were starting to put 2009 behind them.   David’s wrong turn begins as he goes bearish in 2013  In mid-2013, David took the completely erroneous view on the markets by turning bearish on US stocks. Of course he now knows that that was not the time to be bearish as the next few years showed strong growth across the board, especially in the US. The upshot for him leading up to it was that he was very focused on the March 2000 high, when the S&P was nearly right on the 1550 mark. And then in the beginning and then late stages of 2007, it reached almost the exact same level. So as the market had once again approached the same level, it triggered in David the beginning of his wrong call as he was expecting a repeated pattern when, he has realized since that if he had looked at all the evidence, it would probably not have supported his call.   How did that impact David professionally?   He said he learned a lot. As an analyst and as a professional researcher, he pointed out that in such jobs you need to take a stand, to have an opinion. One of the reasons we fall into a lot of behavioral challenges or poor decision making as analysts is because such professionals are programmed to do just that – pound the table, put your foot down and insist that you have the right answer. He admits thought, probably almost half the time you do not have the right answer. The markets make for a very humbling report card for your calls. So he learned very quickly that while it is important to have an opinion, it is also very important to have the humility and intellectual honesty to understand when your call is not working out and then being open and clear on what evidence has caused me to change your mind.   Road to when ‘Dr. Doom’ realized he was wrong   It was definitely a contrarian idea to be bearish at that point because stocks in general were pretty strong and the US market looked very good, riding at record highs.  He realized that he’d made his mark when the trading desk chief referred to him as “Dr. Doom” to a group of people. The driver behind his call though was not just the market being at new highs. He had looked at price momentum in different ways. One common way that technical analysts measure price momentum is with an indicator called the Relative Strength Index (RSI), which says that when something goes up, how much does it tend to go up? And when it goes down, how much does it tend to go down? It is a ratio of the average up moves versus the average down moves. And what you’re looking for is when a market moves to extremes, and that is one of the reasons why today, a lot of analysts are turning negative on the US markets. So that was another piece of evidence that told David that the market had risen a lot, and that it was probably too much, and that he believed he needed to be defensive.   Sector levels supported his bias   The third item he was looking at was sector levels. He remembered that tech stocks in particular were underperforming. This group he expected would do well in a bowl phase, and it was not doing well anymore. On the other hand, consumer staples, were doing quite well. So what he realized there and what he realized from that sector perspective (when did he know he was wrong?) was when he looked at the sectors and saw technology, weak; staples, strong; he has realized since that because those conditions supported his argument, he had succumbed to confirmation bias, and decided he was bearish. Still suffering under the spell of such bias, he then just tried to gather evidence to support that call. As the market continued a little higher, he doubled down in the worst way, and was trying to continue to back it up with only the evidence he wanted to find.   Looking at individual stocks is also insufficient   He learned too that looking at individual stocks was not a good enough indicator either and that there is great value in looking beyond the market. If...