I grew up (professionally) on fundamentals. My first two decades in finance were spent at Value Line, a publication named by its late founder Arnold Bernhard for the line he plotted through a price chart that was meant to depict a stock’s intrinsic value (a formula that changed over time but which typically involved a combination of fundamental data-points and multiples). Although the primacy of that line was long ago supplanted by the firm’s Timeliness ranking system (one of the first quant factor models, if not the first), analysts were still expected to develop solid fundamental investment cases.
Then, during my post-Value Line career, I’ve consistently been associated with the stock screening process, one that is often seen as being based on fundamentals. (Screen for P/E, Growth, Debt, ROE, Cash Flows, etc., etc., etc.).
But through it all, I consistently heard a mantra suggesting use of fundamentals to guide buy-or-sell decisions together with technical analysis to pinpoint opportune times to take action based on one’s conclusions. And in addition to that, I always saw technical analysis as be3ing completely complementary to fundamental analysis. The charts and technical indications don’t materialize from thin air: They are the end result of the collective assessment of actions taken by those base upon how they see the fundamentals and the future for the companies.
In this fundamental-technical partnership, the latter is not just tagging along as an assistant. It actually plays a critical role in plugging up two holes that might otherwise cause the whole fundamental ship to sink:
- There’s more to life than numbers: Data tells us a lot, a heck of a lot. But 10-Ks and 10-Qs and the databases that spring from them cannot tell us how to evaluate the numerical cross-currents we see (inevitably — in fairy tales, all the fundamentals look good or they all look bad, but in real life, there are always numbers pointing in both directions). And there are many more things that are’t reliably or consistently measured and reported at all, such as product quality, market characteristics, employees’ talents, managerial skill, etc. Anecdotes are a dime a dozen especially today, in the age of so-called “alternative data.” Technical analysis allows us to rise above the one-off-maybe-genuine-maybe-not stories by translating a wisdom-of-the-crowd (thank you James Surowiecki for that wonderful phrase) approach into objective screenable data.
- Past Performance Does Not Assure Future Results — But We Need The Future: No matter how much fundamental support there appears to be that points to Buy or Sell, we can’t stop there. Fundamentals come from historic data. That’s the past. They can suggest. But they can’t tell. No matter how deep our analysis, we still need to develop assumptions about the future. As with the unquantifiable items, we can go it alone. But in a world of supply and demand, where financial might makes financial right at least in the short term, it strikes me as reckless not to at least know (whether we agree or not) what Mr. Market is assuming. Again, we’re back to wisdom-of-the-crowd translated into objective, screenable data.
Acti-quant 