eBook: Technical Analysis – an Introduction

As regular readers already know, I have been writing a blog for more than 3 years to educate new investors about investing in the stock market. The experience so far has been quite enriching for me, and hopefully, beneficial for some of the readers.

The stock market can be a fascinating place or a fearsome place – sort of like bathing in the sea. The first few attempts are usually quite humbling – specially if the sea has large waves that keep constantly crashing on to the shore.

The uneducated can get thrown and dashed around by the waves – hurting pride and self-confidence. In extreme cases, the sea waves can drag out the hapless to a watery grave.

To the experienced sea bather, there can be nothing more exhilarating, invigorating and even relaxing. Jumping up to let the smaller waves flow through, diving under the really big breakers, then swimming out and letting the waves gently carry you back to shore is great fun and builds up a healthy appetite.

Likewise for the stock market. The inexperienced buy to find their stock going down, sell to find the stock going up, spend sleepless nights thinking how to salvage their losses – and in extreme cases, commit suicide.

Of those who have been through the experience, some leave the market permanently blaming brokers, operators, market manipulators, friends who gave wrong tips – in fact any one except themselves. Those who stick around to fight another day, try to learn the ropes by reading, or following the advice of experienced market players.

My earlier eBook: How to become a better investor, was published exactly two years ago on New Year Eve. It contained general advice about sector and portfolio selection, and strategies about how and when to invest without losing a lot of money. Several hundred eBooks were emailed – and may have helped a few readers to become better investors. That eBook is now being ‘retired’ – it will no longer be emailed, but will be available for reading on a different blog.

Many of the posts on this blog are about technical analysis of chart patterns. Several readers had requested me to write an eBook on technical analysis, so that the important information can be available easily in one place. After remaining on the anvil for nearly a year, it is finally ready.

Like the previous eBook, this one is also being provided to my blog readers for free - but on two conditions:

First, you need to specifically ask for the free eBook by sending me an email at mobugobu@yahoo.com with your full name. Hiding behind a pseudonym won't help! I would like to avoid spammers to the extent possible.

Second, you can ask your friends, relatives, colleagues to send me an email for the eBook (or send them a link to this blog post) - but please do not forward the eBook to others without my permission. I don't want the eBook to be freely circulated over the Internet.

The eBook has been compiled from selected blog posts and some new material. It is meant to be an introduction to the subject of technical analysis, with a handful of important concepts that are more than enough to arouse the curiosity of those who want to learn more.

2011 has been a disappointing bearish year for most small investors. Please consider this eBook as a small gift towards making 2012 a happier and more prosperous year. Needless to say, your comments and feedback will be most welcome.

Do investors have the ‘if-its-free-I’ll-take-two’ syndrome?

Before I can answer the question, I need to tell the story about the syndrome.

A young boy was being taught by his father about prudence in handling money. Here are the three important guidelines provided by the father:

• Live within your means and try to save money from whatever little you may have
• Always ask the price of anything you wish to buy, and then decide if you can afford to buy it
• Don’t blindly accept a quoted price; try to bargain and buy at a lower price

Well-versed in the guidelines, the young boy went to the local ‘paanwala’ to buy some candy. On being told that the candy cost a Rupee, he promptly started to bargain. Despite repeated pleas by the ‘paanwala’ that there was no discount on a candy costing a Rupee, the boy would not relent. A small crowd had gathered on hearing the commotion, and potential customers were walking away. In desperation, the ‘paanwala’ handed over a candy to the boy, saying: “Take this. It’s free. Now please leave.” The boy was delighted, but refused to budge. “It’s free? Then I’ll take two!”

That boy must have grown up to be a stock investor. He also must have told all his friends – who also became stock investors. How do I know this? Because of the proliferation of web sites offering “sure-shot free stock tips” and “99.9% success guaranteed Nifty tips”.

There was a time when I used to go out of my way to provide free advice to young investors about what stocks to pick and how to build a portfolio. But I no longer give free advice – except in my blog posts. Why? Because I found out that most investors were not following my advice at all. In fact, they were doing just the opposite. They would not buy the stocks I’d recommend, and would go right ahead and buy the stocks I suggested that they avoid!

Then a wise reader related the story of a doctor in a small town who decided to treat patients for free after his retirement. Hardly any one showed up at his chamber. Then he decided to charge a reasonable fee. Soon, he had several patients visiting his chamber every day. The moral of the story is: No one respects free advice.

The other day, I received an email: “Can you please suggest one multibagger stock?” Usually, I ignore such emails, or answer back: “I don’t provide free stock advice.” But I was in a genial mood that day, and wrote back: “Buy Tata Steel.” The response floored me completely. Let alone thank me, this smart fellow came back with: “Any penny-stock multibagger?” This is what I meant by ‘if-it-is-free-I’ll-take-two’ syndrome!

A more dangerous affliction is the ‘if-it-is-free-I’ll-take-as many-as-possible’ syndrome. I got this email from such an investor: “I would like to buy some fundamentally strong stocks in this bear market. Please send me a list of such stocks.” I answered: “I don’t give individual stock advice for free. But you can take a look at some of the beaten down stocks in the Sensex and Nifty indices.”  Back came a response: “OK, I promise to send your fee, but send me the list of stocks now.” I didn’t bother to reply, only to receive this reminder: “I still haven’t received the list of stocks.” Later, I found out that this freeloader was regularly providing free stock tips in one of the investor forums!

The answer to the original question is: Many investors do. I think it is part of the human psyche that we get swayed by products that are offered ‘free’. That is why retailers periodically offer “Buy-1-get-1-free” deals to get rid of unsold or unfashionable or oversized/undersized stock. Shops tend to be overcrowded during such offers.

When it comes to stock advice, ‘free’ usually means ‘not good’. Investors need to appreciate that. If some one really knew which stocks will become multibaggers in future, he would not tell a soul and buy as many of those stocks he could afford before the stock market got wind of it.