Fundamental Folly

I have seen many proponents of fundamental trading recently. Here is a passage from my book The Complete TurtleTrader that puts it all in perspective:

Richard Dennis’s protege Tom Willis had learned long ago from Dennis why price, the philosophical underpinning of Donchian’s rule, was the only true metric to trust. He said, “Everything known is reflected in the price. I could never hope to compete with Cargill [today the world’s second-largest private corporation, with $70 billion in revenues for 2005], who has soybean agents scouring the globe knowing everything there is to know about soybeans and funneling the information up to their trading headquarters.” Willis has had friends who made millions trading fundamentally, but they could never know as much as the big corporations with thousands of employees. And they always limited themselves to trading only one market. Willis added, “They don’t know anything about bonds. They don’t know anything about the currencies. I don’t either, but I’ve made a lot of money trading them. They’re just numbers. Corn is a little different than bonds, but not different enough that I’d have to trade them differently. Some of these guys I read about have a different system for each [market]. That’s absurd. We’re trading mob psychology. We’re not trading corn, soybeans, or S&P’s. We’re trading numbers.” ‘Trading numbers’ was just another Dennis convention to reinforce abstracting the world in order not to get emotionally distracted. Dennis made the Turtles understand price analysis. He did this because at first he “thought that intelligence was reality and price the appearance, but after a while I saw that price is the reality and intelligence is the appearance.” He was not being purposefully oblique. Dennis’s working assumption was that soybean prices reflected soybean news faster than people could get and digest the news. Since his early twenties, he had known that looking at the news for decision-making cues was the wrong thing to do. If acting on news, stock tips, and economic reports were the real key to trading success, then everyone would be rich. Dennis was blunt: “Abstractions like crop size, unemployment, and inflation are mere metaphysics to the trader. They don’t help you predict prices, and they may not even explain past market action.” The greatest trader in Chicago had been trading five years before he ever saw a soybean. He poked fun at the notion that if “something” was happening in the weather, his trading would somehow change: “If it’s raining on those soybeans, all that means to me is I should bring an umbrella.”

See? Easyyyy…

Note: Posted a shorter version of this same excerpt a while back, but it never gets old!

7 thoughts on “Fundamental Folly

  1. if price is the underpinning for donchian’s rule, and you should only follow price, then what is the genesis for price? certainly it is the mass vote of buys and sells for the given security, but what for the most part are those votes based on? can price be solely based on price? guess what i am getting at is that price, for a rational market, must be based on fundamentals, not one market participant’s fundamentals, but the mass vote by the thousands of market participants who buy and sell the security at any given point. however, i can also see where price is based on price – times like the ’98-’99 dot com bubble, stocks like enron before it blew, etc.

  2. Sandwah it seems to me you are suffering from the Need-to-Understand bias, its a common judgemental heuristic. Nothing you said above makes one iota of sense.

  3. Sandwah,

    Up until Isaac Newton, scientists felt they had to understand the “why” of everything. Problem was, there was too much to understand and they had to invent goofy theories to explain basic physical properties because, for them, even a stupid explanation was better than nothing…sort of like Elliot Wave theory.

    Newton developed a formula for Gravity that we still use today. Several of his critics at the time said, “Great, but what is this gravity?” Newton said, “I don’t care what it is…but when you throw a rock in the air, or fire a bullet, this formula tells you how it behaves.”

    Gravity is like price. We don’t care what’s behind it, but we can make reasonable guesses as to its behavior and profit from it.

    If you spend hours every day looking at gold seams, hog slughters, oil supply, weather charts, political whims, new mines, employment numbers, and the position of the planets, you’ll be a great Jeopardy contestant, which is good because you’ll probably need the winnings to make up for your lossses in the market.


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