The Dow Theory is by no means an infallible system for conquering financial markets. It serves only as an auxiliary tool for investment decision-making. Correct investment decisions require three fundamental elements simultaneously: scientific theoretical guidance, objective data possession, and a rational thought process.
Dow's Theorem III elevates Dow far above most famous analysts and investment theorists in history. Dow's acknowledgment of the inherent imperfections in his theory is not an expression of humility but rather demonstrates a scientific and pragmatic approach to thinking. When we survey the numerous so-called "stock market wealth guides," "secret manuals," and "magic formulas" flooding the market, we can deeply appreciate the vast difference between the Dow Theory and such publications. Dow's Theorem is one of the most valuable investment principles for investors to master and reflect upon regularly.
From Dow's Theorem III, the following conclusions can be derived:
1. There is no perfect investment method in the world.
The pursuit of perfection is a common psychological pitfall faced by many investors. The "perfectionist" mentality originates from childhood family influences (restrictive + expectant family environments), intensifies during school education (goal-oriented + passive school environments), and matures under the influence of work environments after entering society (self-value-centered work environments). Since the "perfectionist" mentality can be extremely harmful to investors, it warrants special attention.
Recognizing that there is no perfect investment method in the world can also help investors correctly understand and view risks. The typical investor mindset is to avoid risks as much as possible. Their attitude toward investment is: "This investment might earn me ×× money. Therefore, I am prepared to make this investment." In contrast, professional investors approach investments with the attitude: "This investment might lose me ×× money, but it could also earn me ×× money. The ratio and probability of success are favorable to me, so I am prepared to make this investment." For average investors, they usually see only the potential returns of an investment but overlook the costs. For professional investors, investment risk is one of the costs. They not only consider both investment costs and returns but also correctly assess the cost/return ratio and the probability of success.
For any investment method, investors must recognize several points: First, the inherent flaws of any investment method coexist with its inherent strengths, making it impossible to achieve perfection. Second, the flaws of any investment method are part of the price investors must pay for using it. Third, any attempt to perfect an investment method will diminish its effectiveness.
2. Investors must clearly understand the inherent flaws of their chosen investment method.
Investors must not only recognize that any investment method inevitably has flaws but also specifically understand the manifestations, conditions, and coping strategies for the inherent flaws of the method they use. Additionally, investors must realize that during the investment process, they may commit both Type I errors (rejecting correct hypotheses) and Type II errors (accepting incorrect hypotheses). It is also possible for both types of errors to occur simultaneously, making the study of an investment method's inherent flaws more complex and difficult, as well as making psychological control in practical application harder to manage.
