STREET DOGS

For value investors, fundamentals lead and prices follow, albeit noisily. For technical investors, prices lead — fundamentals are not the core driver of stock movements.

The number of fundamental analysts is more limited than the number of technical analysts. Buying based on fundamentals seems more reasonable than examining recent price charts — seeking out patterns where none might exist. The technical analyst is assumed to have a simpler job because a history of prices is a limited and simplistic signal, whereas for the fundamental analyst, there is a much wider and deeper array of financial information to digest and consider.

But in the end, does effort and sophistication really matter? Taking a step back, the mission for active investors is to beat the market. Active investors should focus on a basic question: what works? Warren Buffett obviously showed that value investing, irrespective of technical considerations, can work. But George Soros and Paul Tudor Jones also showed that technical analysis can work just as well.

Academic research formalises the evidence that fundamental strategies (value and quality) and technical strategies (momentum and trend-following) both seem to work. Many dogmatic investors, however, selectively adopt the research evidence that fits their investing religion. In contrast, an evidence-based investor will conclude that fundamental and technical analysis strategies can both work because they are two sides of the same coin. They share the common objective of exploiting the poor decisions of market participants influenced by biased decision-making.

As Andrew Lo observes: “We all have the same goal, which is to forecast uncertain market prices. We should be able to learn from each other.”

From an article by Wesley Gray at Alpha Architect.

Michel Pireu pireum@streetdogs.co.za