Skip the Analysis and Go Straight to Price

Feedback received today:

Michael, I’ve been thinking recently about fundamental investors’, and really most of Wall Street’s rejection of trends in stock prices, and that bucking the trend is really the ticket to success. They may convince themselves of this fallacy, but in reality, anyone who is successful in the financial markets is a trend follower, even fundamental investors…There are certainly people who jump the gun and purchase an equity when they think it is “cheap” while everybody else thinks it’s “expensive.” But as time goes on, the sentiment regarding an investment opportunity that is decreasing in price will grow more positive and people will begin to purchase the equity. So fundamental investing really does not ignore trends. In fact, in order for fundamental investors to make money, they have to ride trends of market sentiment toward profitability. However, these fundamental investors are at a significant disadvantage to trend followers because while both essentially follow market sentiment (fundamental investors through financial statements, common knowledge, etc. and trend followers through price), trend followers have the added benefit of utilizing calculated risk so that a bad winning percentage, or better yet a bad trade, does not eat them alive. It also doesn’t hurt that price is a much more concrete and certain measurement than an amalgamation of all those subjective fundamental measurements.

Joe makes a good point. Fundamental traders, no matter how they arrive at their analysis and whether it is valid or not, still have to have at the end of the day “a trend” to profit. Without trend (unless you are a leveraged hedge fund selling options and we know how that often ends) you will have a mighty hard time finding profit over the course of a lifetime. The larger point in the comment above is that instead of trying to assemble all of the analysis that purports to tell you what price is doing, why not just go straight to the horse’s mouth and follow price from the beginning.