Why Fundamental Analysis No Longer Works

Why Fundamental Analysis No Longer Works

Fundamental Investors: identify the emotion and you can identify the trend 

Fundamental Investors

At the Tactical Investor, we do not really subscribe to the core principles of fundamental analysis. We do, at times, take certain key aspects of fundamental data into consideration, but we never rely on this data alone.   At the Tactical Investor, Fundamentals are always used in conjunction with Technical analysis and Mass Psychology. As a standalone tool, it is not something we choose to rely on.

The reason behind this thought process is two folded

  • Firstly, we find that technical analysis (when using the right tools), when combined with Mass psychology, is yield’s far superior results
  • Secondly, there is no inductive thinking involved. 

Fundamental analysis mostly relies on deductive reasoning. In order to deduce something, you have to examine certain data that is presented to you in a standard/fixed format. In this sense, you are coming up with conclusions based on the way the data is presented. Since the data is presented in a standard format you and every Joe out, there will/could draw the same conclusion. It is virtually impossible to put inductive reasoning to use here since the data is fixed and presented in a standard format.  

When you look at a chart and use certain TA tools (better to use custom settings in our opinion as opposed to the standard settings) the picture/pattern one see’s is never the same for two given individuals, as the data has to be gleaned from the charts.   Even the same individual looking at the same chart several times could end up seeing something different the more he or she looks at the chart. Technical analysis propels you to rely on Inductive thinking, and we believe this sort of thinking is several orders superior to the deductive thinking process.  When Mass Psychology is thrown into the equation, the individual is pushed to rely even more on the inductive process.

Fundamental investors; be aware that fundamental analysis, only examines fixed data

Hence,  you and everyone else generally arrives at the same conclusion. The same is true for so-called standardised Technical Analysis; the masses are taught to use a standard set of tools in a specific manner so no inductive thinking is involved. When you customise the settings, and you can do this with a host of TA tools, you very often are presented with a different picture. The very simple act of changing the settings sets the inductive process in motion. Therefore, when it comes to the markets, it is imperative that you do your level best not to be part of the herd. If you enjoy being used as cannon fodder, then being part of the herd or following the masses is the strategy you should pursue.

In summary, Fundamental Investors needs to understand that fundamental data that is presented in a standard format. Hence, you have no edge and when it comes to the market, having an edge makes the difference between winning and losing.  However, when you step into the world of TA, it gets complex as you are basically analysing a picture. The saying that a picture is worth 1000 words comes to mind. And when one looks at a picture, there is generally no mass consensus.  As one master the simple but effective concepts of TA, the edge they have over the masses generally widens.

However, Fundamental Investors could improve the odds of their success significantly if they combined fundamentals with Throwing mass psychology.   The same holds true for the Filed of Technical analysis; technical analysis on its own is bound to lead you to astray. We covered this topic in an article titled Why Mechanical and Technical Analysis systems fail. Mass Psychology is a very powerful tool and if utilised properly it can be used as a standalone tool.  Individuals, who have mastered TA, assume that because they mastered some elements of TA, that they have no need to employ Market sentiment analysis when it comes to investing.

Fundamental Investors think that trying to understand how the markets operate is impossible

These simple and easy to follow rules should help improve the outlook for Fundamental investors and the process is a lot simpler.

1) Learn trend analysis, it has a psychological and Technical analysis component built into it already.

2) Mass psychology is simply the ability to recognise that one should never follow the crowd blindly. One also has to measure the degree of euphoria in the so-called contrarian groups. Most of these groups are nothing, but fashion contrarian’s that think it’s cool to try to act like a contrarian.

3) Paradox theory simply boils down to this rule. You never get what you desperately seek. Desperation creates a form of blindness, be it visual or mental; you are no longer fully in possession of your senses, and therefore, you are bound to make some grievous error sooner or later. The desperate only end becoming more desperate. Never chase something, seek it, understand it, and it will come to you. Those that chase only end up running themselves into the ground. We can use the analogy of a beautiful woman and a guy who wants to get her attention to make this concept easier to grasp.

It is generally assumed that beautiful women are hard to approach or talk to. Beautiful women are only hard to approach if you are going to use a line, that’s because they have heard every single line out there and are basically sick of them. If you simply talk to them as you would to a friend (and by the way, try to look them in the eyes while you are doing this), you will be pleasantly surprised with the results. Apply this principle to investing, why try to use and study complex systems based on wave patterns or so-called black box systems, etc.  For example, learn trend analysis, and then slowly apply mass psychology to your analysis.  In terms of technical analysis, try to master 2-3 TA tools/indicators. However, the goal should be to master them well, in contrast to memorising how they operate.

The law of paradoxes, states that the desired result will not be obtained those who chase something; in fact, the one will end up with the opposite of what one was looking for. The idea is to seek and not chase.

The law of balancing; the equation must balance. So if you give more than you get, you will always receive less as the equation must balance.  Hence, Fundamental investors should understand that fixing on one part of the equation will not provide the correct answer. The trend is your friend and everything else is your foe

“Man is an over-complicated organism. If he is doomed to extinction he will die out for want of simplicity.” – Ezra Pound 1885-1972, American Poet, Critic

 Other Articles Of Interest 

Contrarian Investment Guidelines

Technical Analysis

Inductive Versus Deductive reasoning

Mass Psychology Part I, Sept 26, 2007

Mass Psychology II, Oct 2, 2007

Mass Psychology III