The Average Investor's Blog

A software developer view on the markets

The Case Against Fundamental Investing

Posted by The Average Investor on Mar 16, 2010

Right now I don’t care about fundamental trading, but it hasn’t always been the case …

When I first developed interest in the markets, it was, in fact, the fundamental investing that attracted my attention. It was so sound: a business is evaluated and via some quantitative method, a “fair” share price is determined. A position is taken depending on the relation between the “fair” price and the actual price. Elegant, right?

WRONG! It never worked for me, and it’s not that I didn’t try. Why?

Ignoring the possibility that I am one of the dumbest people on the planet (and there is not much I can do if it is true), I came to a few reasonable explanations, each of them weighing against the fundamental approach.

First, it’s me against the cohorts of analysts, institutional investors, etc. Why would I have any chance of doing better then them?!

I know, I know, the little guy has so many chances to beat the pros, in fact there is plenty of literature confirming this fact. Well, despite all my efforts, I didn’t manage to take advantage of it.

Second, are all these smart analysts doing good enough? True, there is always someone who’s predictions did well last year. However, I noticed that the heroes are different, most of the faces keep changing almost every year. I couldn’t help it, but to start asking myself where are the heroes of yesterday?

Last but not least, the base of the fundamental systems, the financial statements, are such a unreliable source of information. It’s hard to find even a single S&P 500 company which uses the same accounting practices for more than 10 years. It was certainly beyond me to develop strategies and conclusions based on such fickle information.

In my disappointment, I slowly started experimenting with technical approaches. It was a liberating feeling – it was as if I was hearing and seeing things with my own senses! A year later I realized that I might not be alone: “Fundamental trading gave me ulcers.” – James Simons. That was it for me.


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