Any studies on FA vs TA?

[Paladin]

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?

 

[MichaelD]

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.

 

[subaru69]

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

 

[MRC & Co]

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

 

[wayneL]

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.

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. :

 

[theasxgorilla]

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.

 

[wayneL]

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

 

[theasxgorilla]

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

 

[Trembling Hand]

Nobody doing conventional things beats the index

Trade frequency being inversely proportional to profitability.

A contradiction laying somewhere in there??

 

[wayneL]

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

 

[cuttlefish]

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.

 

[Paladin]

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

 

[Seneca60BC]

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.

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.

 

[cuttlefish]

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.

 

[MichaelD]

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.

 

[MichaelD]

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.

 

[It's Snake Pliskin]

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.

 

[Trembling Hand]

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.

 

[tech/a]

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!

 

[cuttlefish]

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.