Fundamentals DONT MATTER

[Dan Mezick]

...in deciding to take a position in a security.

That's because the sum-total of all information available in the universe about any security (including the baked-in "fundamental" info) is reflected now, in the price and volume. And in the price and volume of related (correlated and non-correlated) securities, such as options. The price of the base and related securities (and often, the relationships between them) represents everything that can be known, now.

Even "fundamental" analysts MUST resort to the very "technical" study of "trends" in sales, earnings, earnings growth, etc. These "analysts" are actually technical trend followers, in drag.

actually depends on the time frame your looking at.

Awesome post - it takes significant understanding of the markets to realize that fundamentals don't matter. That they are, in fact, not fundamental.

Everyone should read and fully understand your post before investing.

[DesertCat]

[ QUOTE ]
...in deciding to take a position in a security.

That's because the sum-total of all information available in the universe about any security (including the baked-in "fundamental" info) is reflected now, in the price and volume. And in the price and volume of related (correlated and non-correlated) securities, such as options. The price of the base and related securities (and often, the relationships between them) represents everything that can be known, now.


[/ QUOTE ]

Buffett's entire career disproves this. He constantly buys securities in open markets where the market price does not reflect the obvious fundamental value of the security.

As far as fundamental analysis being "trend following in drag", EPS growth is a key component of a securities value, and any fundamental analysis. Whether the "trend" of EPS growth will continue, and for how long, is a big part of the analysis of a securities value.

A trend follower buys because the trend is up and hopes it continues (and that they can sell before it stops). A value investor buys because the current market price doesn't reflect the weighted likelyhood of future earnings discounted for time.

[bobman0330]

If you think about this assertion, it's clearly untrue. Pull up the price history of Yahoo! or some other internet company. Explain for me what caused the value of this business to double between 1999 and 2000, then contract by roughly 90% in the next two years.

[MaxPower]

Wrong. If this were true there would be no correlation between fundamental measures and stock returns.

By the way, I am familiar with the efficient market theory.

[felson]

[ QUOTE ]
The price of the base and related securities (and often, the relationships between them) represents everything that can be known, now.

[/ QUOTE ]

If this is true, then technical trading is useless also.

[Sniper]

Nice way to rekindle this never ending debate /images/graemlins/wink.gif

... and helps to prove the importance of Sentiment analysis /images/graemlins/smile.gif

[imported_bingobazza]

The time frame is the key. Theres no doubt that you can make money by riding trends, but the long term direction of the stock is decided by the fundamentals like how skilled the management is, how easy it is for competitors to invade the companys territory, how good they are at ensuring a good pipeline etc to replace fading cashcows etc.

If you had to put your entire net worth into a company for 20 years before going to the moon, would you rather put it into a company with a long and successful history of increasing earnings at a good clip, or into one on the verge of a large technical breakout?

Its the time frame.

Bingo

[r3vbr]

[ QUOTE ]
...in deciding to take a position in a security.

That's because the sum-total of all information available in the universe about any security (including the baked-in "fundamental" info) is reflected now, in the price and volume. And in the price and volume of related (correlated and non-correlated) securities, such as options. The price of the base and related securities (and often, the relationships between them) represents everything that can be known, now.

Even "fundamental" analysts MUST resort to the very "technical" study of "trends" in sales, earnings, earnings growth, etc. These "analysts" are actually technical trend followers, in drag.

[/ QUOTE ]

The market is far from "perfectly reflecting fundamentals".

[flopking]

A few securities will be perfectly valued by the market... most however, will not.

Understanding these fundamentals and investor psychology is the key to success...

[BarkingMad]

Dan,

You have stated the classical argument favoring technical analysis. It has been around for as long as investors and traders have looked at charts to help guide their decisions.

If you crafted the words yourself, then I applaud you on a well written argument favoring technical analysis. However, the argument as you stated it has a slightly familiar ring to me. May I ask what books you have read that convinced you to regard technical analysis so highly?

[ QUOTE ]
Even "fundamental" analysts MUST resort to the very "technical" study of "trends" in sales, earnings, earnings growth, etc. These "analysts" are actually technical trend followers, in drag.

[/ QUOTE ]

It can also be argued that technical analysts MUST resort to fundamental studies as well. For example, it is foolish to trade widely followed stocks without considering where the stock is in relation to its earnings date, and how it has behaved around previous earnings dates (some stocks have a tendency to rally into their earnings announcements).

Markets are forward looking. The bond market "worries" about upcoming FED reports. The stock market worries about the bond market.

The fact is that there are fundamental forces constantly looming on the horizon that are not reflected in the charts.

"Wait just a minute", you say, "If those forces really matter, and the market really worries about them, then that influence will be reflected in the charts".

This is only partially true. Consider this; if the markets perfectly reflected all known information in their price charts, then the markets would be perfectly efficient, and no profit potential would exist in them.

The reality is that the markets are very efficient, but they are not perfectly efficient. It is possible to profit from statistical price action analysis done with a program like TradeStation or WealthLab. It is also possible to profit by looking at fundamentals. A great approach is to integrate the two concepts.

My .02

[Soxx Clinton]

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Quote:
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The price of the base and related securities (and often, the relationships between them) represents everything that can be known, now.


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If this is true, then technical trading is useless also.

[/ QUOTE ]

This is the way I see it as well. Most of the academic data I've seen shows that technical trading actually ends up contributing to market efficiency and that most technical approaches deliver little excess return after transactions costs. In my opinion, I will echo some of the other posters in saying that I think that markets are very long-term efficient, and that the short-term inefficiencies that exist (and these are pretty common from my vantage point as a portfolio manager) have their explanations in the realm of behavioural finance. ie. for example the notion that the market consistently overprices glamor securities and underprices "grittier" investments etc.

I have had a lot of success with value investing in my career because this strategy positions itself to take advantage of the tendency of the market to be long-term efficient while serving up short-term mispricings due to consistent human behavioural traits that tend to irrationality.

That said, there are a small cohort of purely technical traders that are very profitable though statistics suggest that this group is fairly small, ~10% or so.

[JTrout]

[ QUOTE ]
Awesome post - it takes significant understanding of the markets to realize that fundamentals don't matter. That they are, in fact, not fundamental.

Everyone should read and fully understand your post before investing.

[/ QUOTE ]

Man, that is bad advice, guy!

[ QUOTE ]
A few securities will be perfectly valued by the market... most however, will not.

[/ QUOTE ]

Wrong. The markets discount everything except acts of God. Only God can justify using Fundamental Analyisis in his trading. All of us must use Technical Analysis. Or as an alternative, we can choose to be Random Walkers.

[bobman0330]

OK, let me get this straight. You believe that markets are too efficient to make any money (higher than average return of the market as a whole) through value investing, i.e., buying securities at a discount from their intrinsic value. Meanwhile, you believe money can be made through technical analysis.

This hypothesis is contrary to the evidence, but I understand that's debatable. However, it's also logically inconsistent, which is not excusable. If a security always trades at exactly its value, technical analysis cannot work. Why? Because technical analysis requires price fluctuations not based on the security's intrinsic value. QED.

You use technical tools (moving averages, overbought/oversold, cycles) to design +EV money management systems that let you cut losses short and let profits run. Meanwhile, you try to live with the conflicting belief that it is all random.

BTW, I don't think it is random 100% of the time. 99.9% perhaps, but not 100%. This explains why certain fundamentalists (Jim Rogers, Steindhardt) have made money. They are extemely selective traders that have the courage to go for the jugular when they're winning.

[Sniper]

[ QUOTE ]
If a security always trades at exactly its value, technical analysis cannot work. Why? Because technical analysis requires price fluctuations not based on the security's intrinsic value.

[/ QUOTE ]

This is not a good argument for why technical analysis can't work, for the simple reason that it is not true.

Price and volume trends simply capture a stocks intrinsic value as "perceived" by the totality of market participants.

A good trader will attempt to capitalize on the misperceptions of market participants, when those perceptions are wrong.

A short term trader will capitalize on the variance around the mean intrinsic value.

There are many ways to trade and there are many ways to value a business!

[bobman0330]

[ QUOTE ]
A short term trader will capitalize on the variance around the mean intrinsic value.


[/ QUOTE ]

It cannot simultaneously be the case that the price of a security always reflects the best possible estimate of its intrinsic value and that technical analysis is profitable.

[r3vbr]

Okay is it just me or does this post really have NO LOGIC after all?

[bobman0330]

It's either you or me... I think it's you.

The point is that if the security price always equals its intrinsic value, the price can't change unless the underlying value changes. That being the case, chart patterns or other technical factors cannot predict future movements of the stock.

BTW, I don't believe the premise of this argument, I took it from the OP.

[lastsamurai]

Those you believe in the random walk theory have probably never made money in the market. Good luck with your treasury securities.

[Sniper]

[ QUOTE ]
It cannot simultaneously be the case that the price of a security always reflects the best possible estimate of its intrinsic value and that technical analysis is profitable.

[/ QUOTE ]

Of course it can.. here is the most simplest of examples...

A stock breaks out to new highs on significant volume, because of an intrinsic value change. The insider and early institutional buying create the volume surge. Day Traders jump on the immediate breakout. End of day traders get on the bandwagon the next day. The institutions continue to push the stock up as they refine their analysis of the new intrinsic value. The uninformed public buys at the end of the immediate trend as the day and swing traders start to sell and take their profits when price approaches the new "perceived" intrinsic value. Simple!

[Dan Mezick]

TA and specifically trend following techniques do not attempt to predict, whatsoever.

This point is absolute. There is no prediction in trend following. Probability is all you have to go on. Letting go of predicting (philosophically) is essential to the practice of successfully following trends.

TA and specifically trend following techniques look to identify +EV spots to enter. What plays out after that is a question of uncontrollable events and the 100% controllable practice of applying specific trading discipline.

TA and specifically trend following techniques assign and act upon valid probability estimates of price moving in one of three directions (up, down, sideways) from the current price.

Let "act upon" include the action 'do absolutely nothing'.