Why Fundamentals?


“Michael, I have been a trend follower for a couple of years now. Your book slapped me upside the head sufficiently to get me out of my fundamental analysis ways and see the light. There are a couple of things I still don’t understand though. Why haven’t more people abandoned traditional fundamental analysis, which has no consistency at all, in favor of trend following? I’m actually glad this hasn’t happened because then all us trend followers might be screwed because all the money would be moving together, but how is it that the old fundamental money still dominates the financial market industry? Is it just that firms like Goldman have so much riding on the fundamental investment fallacy that they don’t want people to change their investment strategies, because they have essentially figured out the way people react to stock fundamentals and can score big profits off of it with big money bets? Not only that, but how do fundamental analysis firms still exist in today’s market?”

Isn’t Goldman the exception? With that kind of access and money, are they different? Many think they are. Many think they are invincible. Others say exactly what you say, not as much because of fundamentals, but rather because of extensive leverage in an assorted collection of mean reversion strategies. Time will tell.