Charts Don’t Lie, or Do They?


By Charles Roques

In Greek mythology, Odysseus had himself tied to the mast of his ship so he could hear the Sirens without succumbing to their alluring song. He had been warned by Circe that to submit to them would condemn a sailor to their island until death, or else die trying to swim the waters, depending on which version you know.

For new long-term cannabis investors, especially in the learning stages, daily stock charts can be like the sirens of information. Compared to other available data, it is easy to be tempted by the apparent simple graphic explanation of how the company is doing, except that charts don’t always tell you how the company is doing. Sometimes they tell you more about the performance of the brokers and traders than they do of the company.

It is difficult to avoid the temptation to encapsulate what we want to know about a company in a simple graph and make our work a little easier. Charts are at the core of news reports about the company and are seen often by the public so they have visual importance. Companies understand this too but it would be a serious mistake to follow only them and not keep them in context with other accumulated information.

The cannabis sector can seem as treacherous as the waters Odysseus sailed so it is only natural to respond with relief at the sign of a climbing share price as an indicator of smooth waters ahead, and hopefully of a good company. You may also respond with dismay at an equally dramatic sign of a fall in share price, prompting you to think about selling off your shares, at first glance anyway.

Charts sometimes have over-weighted importance in the cannabis arena because they appear to be the most obvious and outward sign of a company’s progress in the absence of other vital data. It is still an odd sector full of contradiction with some ethically questionable companies having strong upward jumps in share price on their charts, at least temporarily, while other companies with decent numbers, strong management, solid financial structure, good products or services, have low, unremarkable or downward trending charts.

This sector has unique outside pressures that most emerging sectors don’t have. This could and does affect how shareholders and traders buy and sell, which in turn helps create the chart. Charts can have great value for the beginner, not so much as a signal to buy or sell but to start researching a company further. The novice will soon learn that trading and investing can be very different so charts and indicators have to be taken in context of the investment approach.

Although even the best traders operate from gut feelings at times, the new investor could be particularly vulnerable to emotional decisions. The emotional reaction shouldn’t be dismissed but it helps to realize that selling and buying propel the chart movement and the chart only maps that. A novice might read into a chart that the company is becoming more valuable or losing value, but that value can be very transient and temporary.

Remaining lashed to the mast of your research and attempting to stay the course may seem difficult, but it helps to resist the temptation to respond to chart numbers instead of your own due diligence. Small penny stocks like those in the cannabis sector are vulnerable to large buys and sells which may not be indicative of their true long-term value, so it is imperative for investors to keep an objective perspective of a company’s growth and evolution.

Charts don’t actually lie or intentionally misinform, of course, because they are only recording activity, but you need more than that to help you understand a company for long-term investing. Reading a chart tells you about investor interest in a company, but it is only one aspect of a company’s performance. The charts may not give a fair picture because of the doubt about the sector due to legality and other issues. Penny stock charts move a lot and at a rapid pace, but percentages can be deceptive at this price level. A blue chip stock that moves 20% or 30% is cause for major news in part because of the actual share value but a penny stock movement of 30% may mean your shares are now worth $.05 instead of $.04.

Novice investors tend to be attracted to the stock market, like many, because of news about a company broadcast on the business section of the nightly news, because it is mentioned by a friend or simply because they looked at a rising chart and decided something must be good about it, so they buy. Unfortunately, as many soon realize, if the company has made national news, or perhaps made any newscast at all, it is already too late to buy. This is frustrating, but it reinforces the warning that past performance is no guarantee of future growth or performance. What the chart shows is past performance. This sector is vulnerable to pump-and-dump schemes, which grossly exaggerate chart indicators with sharp spikes and dips so a quick look might cause you to overreact.

Long-term investing in the cannabis sector could seem like a crapshoot since the penny stock level is volatile. Charts are only one aspect of the investigation into a company’s overall quality and future performance. Try to be an objective observer of the company you are invested in, or are interested in, and try to keep an eye on its accomplishments, its management, its product and its chart. No matter how enticing or discouraging a chart may be, like every other aspect of a company, it is only one part of the big picture.

Guest Contributor designates a writer who is guest publishing content with MJINews.

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