Did you know that Neil Armstrong was very close to never stepping on the moon?
The Apollo spacecraft had traveled over a quarter of a million miles and commander Neil Armstrong and lunar module pilot Buzz Aldrin were preparing to land, when they had mere seconds to decide if they needed to abort their mission. As the astronauts were descending toward their landing site, the lunar space craft's computer system started flashing error code 1202. It was well rehearsed during training that if certain error codes came up, the astronauts were to abort the mission, no matter how close they were to landing.
Mission control and the astronauts had to make a quick decision to abort or proceed, and the decision fell to a 24-year-old engineer sitting at mission control. He understood what the 1202 error meant, and if it could be ignored or not. The 1202 code was an indicator that the computer system was overloaded, causing the program to temporarily halt, but he determined it didn't pose significant risk to landing the spacecraft. So mission control overrode the flashing 1202 error code and gave the Apollo crew the "Go" order to continue their landing sequence, and as they say...the rest is history.
Investing signals, much like the Apollo 11 computer system, can be quite complex as investors use large amounts of data to generate predictions about the market and economy. And just like the Apollo’s computer system that can become overloaded, economic models are vulnerable to false alarms, which can lead to incorrect investment decisions.
Investors must exercise caution and use multiple indicators to confirm investment decisions. Just as the astronauts had to trust their extension training and experience to make a critical decision in the face of an error code, smart investors should use a systematic approach to make informed investment decisions. Investors can mitigate the risk of false signals by using several market and economic indicators. Relying on a single data point, or a small data set can be problematic at best.
The Apollo 11 error code 1202 and investing signals share similarities; they are vulnerable to false alarms, which can lead to incorrect decisions.
Investors can mitigate this risk by having a well-designed plan that provides a course of action should a 1202 error code start flashing or for any error code that might start flashing. Having a well-designed plan inherently means that the plan has flexibility as new information comes to light, conditions change, or the goal posts have moved.
Expect error codes to flash from time to time, that's part of the journey. Also understand your success will be determined by how you react to them.
-Paul R. Rossi, CFA