# Any studies on FA vs TA?



## Paladin (14 July 2008)

A quick question: has anyone seen any studies from universities or similar that compare, say, a 10 year average return from a group of non-institutional fundamentals investors versus the same data for people who trade on trends?

I've read a lot of stuff from the value investment camp that claims that over the long term, most average trend/chart investors end up mitigating their good years with bad ones. It seems an easy claim to make. I'm wondering if any studies have been done among non-institutional investors that seems to bear our or disprove those claims? 

My main problem is that everything I read on both sides of the fence seems to make sense. I know I'll develop my own approach as I get more experienced, but I'm wondering if there are any objective measures to help guide me?


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## MichaelD (15 July 2008)

There's lots of solid research quoted in "Random Walk Down Wall Street".

Conclusions;

FA doesn't work
TA doesn't work
Nobody doing conventional things beats the index

There's also solid academic research on;
Females making more than Males
Trade frequency being inversely proportional to profitability.


Note that pretty much nobody around here believes a word of it 'cause they're smart. Except me. I'm dumb. And profitable.


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## subaru69 (15 July 2008)

MichaelD said:


> FA doesn't work
> TA doesn't work
> Nobody doing conventional things beats the index




I posted this on another thread before but it backs up this argument.

http://www.nytimes.com/2008/07/13/business/13stra.html?em&ex=1216180800&en=9c507bb2f9b1e7f3&ei=5087


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## MRC & Co (15 July 2008)

Paladin said:


> My main problem is that everything I read on both sides of the fence seems to make sense. I know I'll develop my own approach as I get more experienced, but I'm wondering if there are any objective measures to help guide me?




Oh god, here comes that storm cloud again!

Try both and use whatever works for you.

I used F/A, but after the global economy looked ready to sh*t itself, I swaped to T/A.  

Not sure how reliable earnings forecasts are in this environment.  Makes F/A almost impossible for me due to this reason.  Earnings forecasts are about as reliable as flipping a coin at the moment IMO.

Duck and cover.  
:couch


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## wayneL (15 July 2008)

MichaelD said:


> There's lots of solid research quoted in "Random Walk Down Wall Street".
> 
> Conclusions;
> 
> ...



Don't you just love sweeping generalizations?

I love them too, so long as they are sweepingly general sweeping generalizations. 

Broadly, nothing at all works... TA, FA, Quant, Market neutral, Trend following... NUTTIN'!

On another matter, solid academic research is also usually utter nonsense.

You have to get Tao about it. 

Nothing works.
Everything works.
What does work mean?
If it doesn't feel bad.
It's not good.
So, do what feels wrong.
Say what nobody agrees with.
Fade Bubblevision.
Money is only numbers.
The market a game.
A game is to be won.

Therein lies the secret, Grasshoppers. :


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## theasxgorilla (15 July 2008)

wayneL said:


> Therein lies the secret, Grasshoppers. :




"A good JKD man does not oppose force or give way completely. He is pliable as a spring; he is the complement and not the opposition to his opponent’s strength. He has no technique; he makes his opponent's technique his technique. He has no design; he makes opportunity his design."  Bruce Lee.


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## wayneL (15 July 2008)

Sheesh we're getting deep and meaningful here. 

_Empty your mind, be formless, shapeless--like water.
Now you put water into a cup, it becomes the cup,
You put water into a bottle, it becomes the bottle,
You put it in a teapot, it becomes the teapot.
Now water can *flow* or it can *crash*!
Be water, my friend._
-- Bruce Lee


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## theasxgorilla (15 July 2008)

Only because that quote is so good and best delivered by the man himself, as we remember him, out of sync and all:

http://www.youtube.com/watch?v=OW-cnizLDEE&feature=related


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## Trembling Hand (15 July 2008)

MichaelD said:


> Nobody doing conventional things beats the index
> 
> Trade frequency being inversely proportional to profitability.




A contradiction laying somewhere in there??


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## wayneL (15 July 2008)

theasxgorilla said:


> Only because that quote is so good and best delivered by the man himself, as we remember him, out of sync and all:
> 
> http://www.youtube.com/watch?v=OW-cnizLDEE&feature=related




Ah it seems Bruce Lee, Kung Fu and Taoism have much to offer to the trader.

One more indulgence: (with some bastardization to suit trading)

_When he is born, man is gentle and supple.
Yet at death, his body turns brittle and hard.
Living plants are flexible, and filled with life-giving sap,
but at their death they snap when they are bent.
The stiff, the hard, and brittle are harbingers of doom,
and gentleness and yielding are the signs of that which lives.
The warrior who is inflexible condemns himself to death,
and the tree is easily broken, which ever refuses to yield.
Thus, the inflexible and dogmatic will surely fail,
and the flexible and adaptable will overcome._

Tao Te Ching 76


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## cuttlefish (15 July 2008)

wayneL said:


> If it doesn't feel bad.
> It's not good.
> So, do what feels wrong.





Shorting banks feels good ...  "it felt so wrong but it felt so right" 


Shorting the bank you owe money too feels even better.


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## Paladin (15 July 2008)

Ha! Thanks all. How'd you know I'm a closet Daoist?  

I'm just hoping that the old adage of "Before enlightenment, chopping wood, carrying water - after enlightenment, chopping wood, carrying water" doesn't hold if you substitute "enlightenment" with "the recession".

And what - no Sun Tzu yet? Better remedy that:

_  So it is said that if you know your enemies and know yourself, you will fight without danger in battles.
    If you only know yourself, but not your opponent, you may win or may lose.
    If you know neither yourself nor your enemy, you will always endanger yourself._

Just give me a moment while I try to take that rock out of your hand.

(Oh - and I am paying attention to the actual advice in these posts, but it seems more fun the way it's headed


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## Seneca60BC (15 July 2008)

MichaelD said:


> There's lots of solid research quoted in "Random Walk Down Wall Street".
> 
> Conclusions;
> 
> ...




Well I can confirm one thing - FA definitely DOES NOT WORK - and I use to be a firm believer - yes I am also in the dumb camp AND not profitable.


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## cuttlefish (15 July 2008)

Seneca60BC said:


> Well I can confirm one thing - FA definitely DOES NOT WORK - and I use to be a firm believer - yes I am also in the dumb camp AND not profitable.




I won't claim to have all the answers but in my view FA works over the longer term if applied correctly because ultimately fundamentals do drive share prices (or more generically asset values) over the longer term.  An important part of applying FA correctly is to apply it objectively (i.e. unemotionally) and to an appropriate level of detail, and very importantly to realise and acknowledge when the fundamentals have changed and avoid the 'buy and hope' or 'bottom drawer' mentality. 

Fundamentals need to be assessed in an absolute sense and also in a relative sense, and at varying levels including the macro economic level, sector level and at a stock specific level. 

It is also important to understand the shorter term pyschology of the market and other forces such as availability of credit that all drive the markets - both at a company level (e.g. ability to obtain credit for projects etc.) and at an investor level - these are in fact all macro fundamental factors that should be taken into account.

I also believe that the only true FA is one that is genuinely looking at a share investment as a business investment and so is assessing value based on current and future profit vs current value and vs the risks that stand in the way of obtaining those future profits. It is also essential to be re-assessing and acting on a continuous basis as the fundamentals change.

In a bull market when sentiment is positive people see opportunity and downplay risk, in a bear market people see risk and downplay opportunity, thus there is far less leeway on a fundamental investor during a bear market than a bull market - but it is also a time where great opportunity can be ignored by the market in the same way that great risk gets ignored in a bull market.  

The most important thing regardless of FA or TA is to find and refine your own style - every time things don't work assess what it was that went wrong - was it the analysis itself, was the analysis influenced by emotion, was it the entry decision, was it the amount of capital applied, was it the lack of an exit plan, was it a lack of discipline in following the plan, was it poor money management rules, was it a lack of discipline in following money management rules etc. etc.   

My view is that the biggest enemy to succesful outcomes is usually our own emotion and discipline - and its very important when things go wrong to not blame the tools, the market or the analysis if the cause is in fact inside yourself.


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## MichaelD (15 July 2008)

Me: 'Trade frequency being inversely proportional to profitability.'
TH: <image of big bucks job for high frequency trading systems development> A contradiction laying somewhere in there?? 

Not at all.

Who makes money from the markets?


1. People who don't actually trade but sell you services and info on how to trade (tip sheets, brokers, data feeds, booksellers).

2. People who run hedge funds - not because they can trade but because they can attract other peoples' $ and earn a % from how much they manage, not how much they make.

3. People doing conventional things coupled with sound risk and money management (swing traders, trend followers et al).

4. People doing unconventional things.


4 is by far the most profitable but also by far the rarest - traders with REAL edges.


All else being equal, people doing conventional things *only* will be less profitable the higher their trade frequency.


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## MichaelD (15 July 2008)

wayneL said:


> On another matter, solid academic research is also usually utter nonsense.




What utter nonsense. 

Like all things academia, the research itself is usually solid, but the conclusions are usually generalised inappropriately.

eg Lots of the stuff referenced in Malkiel's book concludes that FA and TA can't beat the index.

However, that's not the complete picture of the research, as all the research actually looks at are FA and TA as entries and completely ignores risk and money management.


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## It's Snake Pliskin (15 July 2008)

MichaelD said:


> Like all things academia, the research itself is usually solid, but the conclusions are usually generalised inappropriately.
> 
> eg Lots of the stuff referenced in Malkiel's book concludes that FA and TA can't beat the index.
> 
> However, that's not the complete picture of the research, as all the research actually looks at are FA and TA as entries and completely ignores risk and money management.




Michael,

The world is not a box. 
Being told "YOU CAN'T beat the index" is not cool.


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## Trembling Hand (15 July 2008)

MichaelD said:


> 2. People who run hedge funds - not because they can trade but because they can attract other peoples' $ and earn a % from how much they manage, not how much they make.




Not true Hedge Funds run on the 2/20 rule (or a mix of, like 2/40)

That is 2% of funds invested as an administration fee for the funds expenses like admin, audit etc and 20% of profits. No profit then the hedge fund owners make no money.


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## tech/a (15 July 2008)

Don't think you could ever do one.
To many variables.
In ANY analysis there are times of long periods of success and the same in failure---not to forget long periods of nothing.
Its simply a matter of getting on the long periods of success and stepping off the periods of failure.

Both can be successful.

But I think its a matter of whats comfortable with the practitioner.
I cant stomach pouring over financials but some are really good at it.

I cant handle analysing a chart to death technically either.

*If its not obvious then its not obvious!*


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## cuttlefish (15 July 2008)

tech/a said:


> *If its not obvious then its not obvious!*





This is a very good point and applies equally well to FA and TA imo.  Too often I suspect participants in both camps will find what they are looking for by adding complexity and using that complexity to justify the position they want to see.

An unbiased/objective viewpoint is the most important ingredient when commencing any analysis - and more importantly maintaining that lack of bias after taking an entry is essential as well for both methods.


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## Paladin (15 July 2008)

cuttlefish said:


> In a bull market when sentiment is positive people see opportunity and downplay risk, in a bear market people see risk and downplay opportunity, thus there is far less leeway on a fundamental investor during a bear market than a bull market - but it is also a time where great opportunity can be ignored by the market in the same way that great risk gets ignored in a bull market.




That, my appetising friend, is one hell of a good point, methinks.


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## prawn_86 (15 July 2008)

Seneca60BC said:


> Well I can confirm one thing - FA definitely DOES NOT WORK - and I use to be a firm believer - yes I am also in the dumb camp AND not profitable.




Perhaps you are looking at the wrong time frame for FA. 

Plus im sure all those who have made money from FA would disagree with you.

WHat you mean is FA doesnt work, *FOR YOU*


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## tech/a (15 July 2008)

Ive never seen a post from a Fundie to go short?

Do fundies ever look for weakness?
Overvaluation---and of course take action on it?


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## prawn_86 (15 July 2008)

tech/a said:


> Ive never seen a post from a Fundie to go short?
> 
> Do fundies ever look for weakness?
> Overvaluation---and of course take action on it?




You obviously havnt read much fundie analysis then.

Personally i dont go short as my broker doesnt allow it, but i have called a few shorts.

MRC&CO has fundie leanings and often goes short, same with Reece55 as far as im aware


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## Paladin (15 July 2008)

I'm going to take this totally OT for a bit.

Has anyone seen a daoist spoof of the market, like "The Tao of Pooh" and "The Te of Piglet" did for the winnie the poo books? Reading all these quotes etc has made me think that such a book would be a good pitch and might be a bit of fun.  "The Tao of Wall Street?" "The Chart of War?" I have a few books in print and if anyone wants to play with this idea, contribute a chapter, or whatnot, feel free to PM me. I'm too clueless to write such a thing myself, obviously, but reckon my lit agent (who is in a Sydney/New York/London outfit and one of the biggies) would like this. I also have a good in with the editor at Random House who looks after finance books.


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## wayneL (15 July 2008)

prawn_86 said:


> Perhaps you are looking at the wrong time frame for FA.
> 
> Plus im sure all those who have made money from FA would disagree with you.
> 
> WHat you mean is FA doesnt work, *FOR YOU*



Exactly.

This is the point I rather obtusely tried to make before.

Nothing works (If it doesn't work for you)
Everything works (Because lots of people are using "it" to make money)
What does work mean? (If it does what the trader wants, it works)

etc etc

Academic studies are nonsense not because they come to the wrong conclusion, but because they ask the wrong question.

Holy crap, even Gann works for some past being fooled by randomness.

All is nonsense, yet all makes sense.


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## cuttlefish (15 July 2008)

tech/a said:


> Ive never seen a post from a Fundie to go short?
> 
> Do fundies ever look for weakness?
> Overvaluation---and of course take action on it?





Yeah I do occasional shorts (back earlier in this very thread I mentioned a bank short).  In hindsight I wish I'd been using them more over this year though I'm still refining my short term trading technique so its been a sideline rather than the main game.

One issue with shorting is finding a good instrument for doing it. I've been using options but don't like the MM spread slippage and lack of liquidity.  I'd have the same concerns doing it via CFD's.  

The timeframe is an issue as well - unlike long positions the timing seems more important for the short positions as they tend to occur abruptly (and when using options you have to juggle the greeks as well and make sure the position doesn't get eroded too much by theta decay or IV collapse etc.).

I've only been allocating relatively small capital to the positions but because they're leveraged they've still proven very profitable when the timing has been right.

I'm also incorporating my amateur TA when entering or closing short positions - so using an overall fundamental view then technicals to try to get the timing right (candlesticks, support/resistance and simple chart patterns).

Still a bit hit and miss with it so have only used it when I've felt its a fairly obvious opportunity. I also find it a bit hard to implement stops effectively with the options MM slippage.

When I trust myself enough I'll open a futures account as I think this is the best vehicle for this sort of thing, but as mentioned I'm still refining my shorter term trading technique and discipline.


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## MRC & Co (15 July 2008)

prawn_86 said:


> MRC&CO has fundie leanings and often goes short, same with Reece55 as far as im aware




I actually only go short on T/A.  

A great company can only fall so far, until of course, those fundamentals change (got caught on JST with it's profit downgrades, despite them clearly stating their business is thriving and on a fire at the EQN construction site , ha ha).  But the later is still good for the cheese I feel, not so sure about the former, retail sector is now being hit full-force by this downturn, check out latest retail figures.  http://www.stgeorge.com.au/resources/sgb/downloads/treasury/eco_outlook/July_2008.pdf

Should have been more proactive and dumped this one earlier, as stated in my blog.

Dogs can also rise far beyond their fair value, but I have never tried going short on them (then again, I don't really peruse dogs in an uptrend).  May be something to look at down the track.  

Fair value of course, is quiet a subjective word, so my F/A value is just that.  

I use F/A in two ways.  Wait for a great company to become rediculously undervalued and then a T/A set-up (I will then either trade this stock or if I really love it and the price, put it in the bottom drawer).  

That being said, T/A (of course with trade and money management) is what is keeping me afloat at the moment.  

Both though, definately worth their weight in gold if you know how to use them.  While most don't beat an index, plenty still do.  Can't be hard to beat the current index, right?  The bank alone will do that for you!  

I know there are some guys here who are probably averaging 100% pa over the last several years.

Cuttle, you can short a lot of the big names through IB, espeically on the US market.  You can do it with your own funds, or upto 50% margin.  I personally, use the later.

Anybody been on the MER (Meryll Lynch, spellling?) short lately?  ha ha.  Wayne?


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## wayneL (15 July 2008)

MRC & Co said:


> as stated in my blog.




M, 

You have a blog? What's the URL?


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## MRC & Co (15 July 2008)

wayneL said:


> M,
> 
> You have a blog? What's the URL?




Wayne,

Just my rediculous little ASF blog.  Really should create a page for one and do it properly.  

I have a lot of economic and global macro ramblings to make.


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## Julia (15 July 2008)

Seneca60BC said:


> Well I can confirm one thing - FA definitely DOES NOT WORK - and I use to be a firm believer - yes I am also in the dumb camp AND not profitable.



Others have already aired appropriate responses to your assertion that "*FA definitely does not work*".
To your comment that you are not profitable, may I very politely ask what you are doing about that?  If you have rejected the FA approach, then what is your current approach?


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## mazzatelli1000 (13 September 2008)

As someone who has worked in the accounting industry and audited financials of big companies --- i dont believe in pure FA as much as I used to

To much complacency in procedures and controls 

For me having an overall economic sense of the market, combined with some TA and essential fundamentals of the underlying (not necessarily performing financial statement analysis) has worked.


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## johenmo (14 September 2008)

mazzatelli1000 said:


> As someone who has worked in the accounting industry and audited financials of big companies --- i dont believe in pure FA as much as I used to.
> 
> To much complacency in procedures and controls




All I can say is Amen to the above.

I'm not an accountant but still work for a big company, and all I can say for nearly all the organisations I've worked for/come in contact with is that if they were half as good as they think they are, they'd be a hell of a lot better than they really are!  

Newbies trying to figure this out could get confused by the above.   My FILaw is pure FA and has made heaps (he's not interested in trading) but he is careful about what he buys and when.  I think he could probably do better with some TA and as I work on building something I can see that I will use both.

As for studies - I think there's too many variables for a conclusive study.


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