Regulations? No, Less Rigging the System!

Consider some feedback:

Michael, a couple of things: first, in your very interesting interview with Ben Hunt, you and he spend some time criticizing financial regulations and regulators. Particularly you dislike the idea of private trades needing monitoring and some oversight. Yet, it is clear, the private trades of 2008 that packaged mortgages as first class investments sold to others – when clearly they were not – damaged our economy in very disastrous ways. And this was possible because all these trades and investment vehicles were sold in private with zero oversight or regulations. It seems that oversight and regulation were very necessary but had been dismantled over the years. In addition, allowing the banking industry to no longer hold deposits safe from trading loss had a terrible domino effect. So I have trouble with the fully anti-regulation commentary I sometimes hear from your stuff. But on to other things – since neither of us can control that anyway. The Motley Fool is in our weekend paper. The following article appeared this Sunday. It had some content that seem to contradict some of your commentary. Specifically, putting Soros as a fundamental trader and then the study that showed fundamental traders having more success than technical traders. Care to add your clarifications for all our benefit? One I see that is a glaring difference is the idea that all technical traders predict the outcome for a stock. Here’s the article:

Technical or fundamental?

As you learn about investing in stocks, you’ll run across two key approaches: fundamental analysis and technical analysis. We at The Motley Fool have long favored the former. Fundamental analysts study companies and make investment decisions based on factors such as financial health, competitive advantages, management quality, growth prospects, profitability, price-to-earnings (P/E) ratios and macroeconomic factors. In contrast, technical analysts focus on charts reflecting companies’ stock price movements and trading volume, and make investment decisions based on patterns they see in them. Fundamental analysts explain that shares of a company’s stock represent a piece of a business, and that investors are buying a piece of that company’s future cash flow generation. Technical analysts believe that price patterns repeat themselves because we humans react similarly to similar market events — so they seek certain patterns.

Technical analysts ignore many determinants of a company’s performance, including its regulatory environment, country of operations, etc. If two companies, no matter how wildly different, happen to have similar historical charts, a technical analyst will predict similar outcomes for each. That defies logic, don’t you think? Think, too, of the world’s most famous successful investors, such as Ben Graham, Warren Buffett, Peter Lynch, John Templeton, Shelby Davis, Philip Fisher, George Soros, David Dreman and John Neff. Despite their different approaches, each outperformed the overall market using fundamental analysis. It’s hard to come up with a group of hugely successful investors known for using technical analysis.

A 2008 study by New Zealand’s Massey University tested more than 5,000 technical analysis strategies in 49 different countries. The result? Not one added value “beyond what may be expected by chance.” A study of Dutch investors found technical investors earned lower returns. You can succeed with a bad strategy, but usually only in the short term and often due to luck. The evidence strongly suggests that buying stocks using technical analysis will lose you money. Large nest eggs can be built over many years using fundamental analysis — or simply by investing.

Bruce Stryd

The article at the end that criticizes TA and cites Dutch investors, I talked to them. Arvid Hoffman is on my podcast explaining what it is they exactly studied, and it was not trend following. Fool article misleading as usual–since their inception. Further, it is the typical article critiquing predictive TA and ignoring reactive TA (or trend following). Additionally, regulation is fine as long as it is equally applied and not part of an overall crony capitalistic system. As of now it is clearly part of a crony system. Lastly, the only reason the private trades were a disaster in 08? Because the government bailed out GS with QE and ZIRP. Let the bad companies fail. Bankruptcy regulation was firmly in place in 08. It was not allowed to work because the system is rigged. The issue is not more regulation or less, it’s a case of a rigged system.