Fundamentals DONT MATTER

[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?

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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.

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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.

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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]

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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.

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Man, that is bad advice, guy!

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

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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]

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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.

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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]

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


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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?