Confirmation

Confirmation, in the investment world, is the practice of seeking additional evidence to support an initial conclusion or signal. Think of it as getting a “second opinion” for your investment idea. For a technical analyst glued to charts, this might mean one indicator backing up another's signal to buy or sell. For a value investor poring over financial statements, it’s about finding real-world events or data that prove their underlying investment thesis is on track. While seemingly a prudent step, the quest for confirmation is a double-edged sword. It can provide a crucial layer of security and reduce the odds of acting on a false signal. However, it can also lead investors straight into the psychological trap of confirmation bias, where they only see what they want to see, ignoring evidence that contradicts their brilliant (or not-so-brilliant) idea. Understanding this duality is key to using confirmation as a tool, not a crutch.

The idea of “confirmation” means slightly different things depending on which investment camp you're in. While both seek validation, how they find it and what they're validating are worlds apart.

For those who believe a stock's history is written in its price chart, confirmation is all about validating a pattern or trend. A technical signal on its own is just a hint; a confirmed signal is one that's much harder to ignore. The goal is to avoid “whipsaws”—getting into a trade on a false signal only to have the price immediately reverse. How do they do it? By looking for agreement between different tools and indicators.

• Volume Confirms Price: A rising stock price is interesting. A rising stock price on high trading volume is compelling. The high volume suggests strong conviction behind the move. Conversely, a big price move on low volume is suspect and may not last.
• Indicators Confirm Each Other: A chartist might wait for a “buy” signal from a moving average crossover to be confirmed by a similar signal from another indicator, like the Relative Strength Index (RSI) moving out of oversold territory.
• Price Confirms a Breakout: When a stock price breaks above a key resistance level or trendline, a technician will watch to see if it holds. A successful “retest,” where the price dips back to the old resistance level and then bounces off it (treating it as new support), is a powerful form of confirmation.

A value investor, grounded in the principles of Benjamin Graham, couldn't care less about chart squiggles. Their confirmation comes not from the market's mood swings, but from the real world of business and finance. Their “signal” is the conclusion of their fundamental analysis—that a company is trading for less than its intrinsic value. Confirmation, then, is any evidence that their analysis is correct and that the company's value is being unlocked. This type of confirmation is a slow-burn, unfolding over quarters or even years.

• Earnings Reports: Did the company's quarterly results meet or exceed the expectations that formed your thesis? Are profit margins expanding as you predicted? This is confirmation straight from the source.
• Strategic Moves: The company announces a share buyback program, a major new product launch you anticipated, or the successful integration of a recent acquisition. These actions confirm that management is executing the plan you bet on.
• Industry Shifts: A key competitor stumbles, strengthening your company's competitive advantage or moat. This external event validates your assessment of the company's superior position.
• Insider Actions: When executives and directors (insiders) buy their own company's stock with their own money, it's a strong vote of confidence that confirms your bullish outlook.

Here's the big, flashing warning sign. Our brains are wired to seek agreement. This psychological shortcut, known as confirmation bias, is one of the most destructive forces in investing. It’s the tendency to actively search for, interpret, and recall information in a way that confirms or supports one's prior beliefs or values. It doesn't matter if you're a value investor or a technical analyst; this bias will find you.

• The technical trader who is bullish on a stock will start seeing bullish patterns everywhere, while conveniently ignoring the bearish signals.
• The value investor who has fallen in love with a company will celebrate positive news but explain away or downplay negative earnings reports or a deteriorating balance sheet.

So, how do you get a “second opinion” without just hearing your own voice echoed back?

1. Play Devil's Advocate: Actively search for information that disproves your thesis. What could go wrong? Why might the other side be right? If you can't find a compelling bearish argument, your bullish case is likely much stronger.
2. Keep an Investment Journal: Write down your original thesis in detail. Why did you buy this stock? What were your expectations? This written record prevents you from retroactively changing your story to fit the latest price action.
3. Seek Diverse Opinions: Read analysis from people you know disagree with you. It might be uncomfortable, but it's the best medicine for a bad case of confirmation bias.

Ultimately, genuine confirmation strengthens an investment case. But confirmation born of bias is just a comforting lie you tell yourself before losing money.