Why are value investor types so rigidly opposed to TA?

[kimchi]

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If you read the "Market Wizards"-series of books by Jack Schwager, he interviews the most successul traders of the 80´s and 90´s. When asked about their strategies, about 70% of them contribute their success to TA. I take that as a proof that TA works very well, if you know how to use it.

But as someone pointed out, it may be hard to day-trade with a $80 billion account since you would move every market except forex.

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I think some of those folkes (inc. "The New Market Wizards" interviewees) are now busto.

[novel20]

You can use TA and develop a strategy with amazing back-testing results. The problem is, it probably won't give such amazing results going forward.

[ArturiusX]

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From a trading perspective, TA is superior to FA. FA can take years to "work" while TA can be scaled to minute by minute gyrations. From an investing perspective, FA is superior to TA. FA provides a higher degree of reliability while TA is a coin toss or relatively trivial.

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I find it ironic you call TA a coin toss. FA is based on what you estimate to be the intrinsic value of a security. Evidence has shown that even if you have solid fundamental information, its a coin toss whether the market will take in that information and put it into the stock price. The market only reflects supply/demand values. It does not need to reflect the true value of the security. One could argue that eventually, a security always returns to its true value; that may be true, but how long does that take? securities stay wrongly priced for YEARS. Profiting from FA is easy. Beating the market, making above average returns from FA, now thats a coinflip.

[stephenNUTS]

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From a trading perspective, TA is superior to FA. FA can take years to "work" while TA can be scaled to minute by minute gyrations. From an investing perspective, FA is superior to TA. FA provides a higher degree of reliability while TA is a coin toss or relatively trivial.

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I find it ironic you call TA a coin toss. FA is based on what you estimate to be the intrinsic value of a security. Evidence has shown that even if you have solid fundamental information, its a coin toss whether the market will take in that information and put it into the stock price. The market only reflects supply/demand values. It does not need to reflect the true value of the security. One could argue that eventually, a security always returns to its true value; that may be true, but how long does that take? securities stay wrongly priced for YEARS. Profiting from FA is easy. Beating the market, making above average returns from FA "ALONE", now thats a coinflip .

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SF [img]/images/graemlins/cool.gif[/img]

[Mark1808]

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From a trading perspective, TA is superior to FA. FA can take years to "work" while TA can be scaled to minute by minute gyrations. From an investing perspective, FA is superior to TA. FA provides a higher degree of reliability while TA is a coin toss or relatively trivial.

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I find it ironic you call TA a coin toss. FA is based on what you estimate to be the intrinsic value of a security. Evidence has shown that even if you have solid fundamental information, its a coin toss whether the market will take in that information and put it into the stock price. The market only reflects supply/demand values. It does not need to reflect the true value of the security. One could argue that eventually, a security always returns to its true value; that may be true, but how long does that take? securities stay wrongly priced for YEARS. Profiting from FA is easy. Beating the market, making above average returns from FA, now thats a coinflip.

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FA is is definately a skill set that not many posess. Not only do you have to have the ability to find under valued scurities but you have to have the psychological ability to hang on through thick and thin which may be a long time. So, I totally agree with you. Beating the market is not easy no matter which method you use. Its just that for a taxable account taxes and transactions cost are considerably less for long term investing then for short term trading.

[DesertCat]

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From a trading perspective, TA is superior to FA. FA can take years to "work" while TA can be scaled to minute by minute gyrations. From an investing perspective, FA is superior to TA. FA provides a higher degree of reliability while TA is a coin toss or relatively trivial.

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I find it ironic you call TA a coin toss. FA is based on what you estimate to be the intrinsic value of a security. Evidence has shown that even if you have solid fundamental information, its a coin toss whether the market will take in that information and put it into the stock price. The market only reflects supply/demand values. It does not need to reflect the true value of the security. One could argue that eventually, a security always returns to its true value; that may be true, but how long does that take? securities stay wrongly priced for YEARS. Profiting from FA is easy. Beating the market, making above average returns from FA, now thats a coinflip.

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Actually your example proves that FA provides market beating returns. If you can buy a stock below IV, and know it's price will eventually converge to IV, you will earn the market return plus the discount you paid over the time it takes for convergence.

It's because efficient market theory tells us stocks should be price to provide similar returns, intrinsic value should equal market price and that price should yield expected market returns going forward. When you find a mispriced stock it's at a discount to IV, by the time price converges with IV it will actually reach IV2, IV of several years from now earning back the discount plus the market returns of those years.

Now this is all general, it doesnt guarantee returns with any single pick due to variance. My Iphone makes it difficult to edit long posts so let me continue....

[Ps3tn0NcYk]

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I find it ironic you call TA a coin toss. FA is based on what you estimate to be the intrinsic value of a security. Evidence has shown that even if you have solid fundamental information, its a coin toss whether the market will take in that information and put it into the stock price. The market only reflects supply/demand values. It does not need to reflect the true value of the security. One could argue that eventually, a security always returns to its true value; that may be true, but how long does that take? securities stay wrongly priced for YEARS. Profiting from FA is easy. Beating the market, making above average returns from FA, now thats a coinflip.

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You do realize that in an effort to counter my argument you simply reiterated it?

[DesertCat]

The real challenges of value investing are

1) IV is always an estimate or even an estimated range and its accuracy depends upon the predictibilty of the investment and your skill and experience.
2) You need to buy at a substantial discount to that IV estimate, your margin of safety, to protect against mistakes.

The biggest problem most attempted practitioners have is a lack of fortitude, patience and ignorance of there own limitations. If you think you can buy at a 10% discount because your IV estimates are always within 5%, you are guilty of hubris and will pay dearly. You need to have the patience to wait, even when awash in cash, for those 50% discounts. And when you find one, you have to have the fortitude to commit a big part of your portfolio to it.

Buffett demonstrates awareness of his own limitations when he refuses to look at a stocks price before he estimates its value, he doesnt want to influence his analysis. That is probably a weakness of mine, I sometimes find a set of assumptions that justify buying at todays price to see if I'm comfortable with them, i.e. XYZ is a buy if I believe its merger is at least 85% likely. Thats backwards, I should make my best estimate of the merger happening and the figure what price makes sense.

My biggest strength is fortitude, I'm willing to make big bets when odds are great. But my results have been poor this year because I lacked patience, I jumped into opportunities I really liked without getting a big margin of safety. Guess what? They are all trading at a big margins of safety now and I am fully invested! Lessons learned that hopefully make me a better investor going forward.

[DcifrThs]

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From a trading perspective, TA is superior to FA. FA can take years to "work" while TA can be scaled to minute by minute gyrations. From an investing perspective, FA is superior to TA. FA provides a higher degree of reliability while TA is a coin toss or relatively trivial.

[/ QUOTE ]

I find it ironic you call TA a coin toss. FA is based on what you estimate to be the intrinsic value of a security. Evidence has shown that even if you have solid fundamental information, its a coin toss whether the market will take in that information and put it into the stock price.

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please link this evidence. i'd love to dig into it.

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securities stay wrongly priced for YEARS. Profiting from FA is easy. Beating the market, making above average returns from FA, now thats a coinflip.

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odds against succes are imo longer than a coinflip. you have to be in the top top % to really do well with either FA or TA imo (well = mkt beating consistently).

i worked at a top multistrategy solely fundamental (though insanely highly quantitative) fund and they had an information ratio of 1.0 for over 15 years.

Barron

[Macce]

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I think some of those folkes (inc. "The New Market Wizards" interviewees) are now busto.

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No they are not, but let´s assume they are. Even then, it still provs that TA worked out for them while building their fortune. Market conditions maybe changed and they did not react to that, or they used to high leverage and went broke, like a lot of the very best poker pros has done. That still does not make them losing players, and it still makes the market wizards winning traders by using TA.

And if TA did work for in the 80´s and 90´s, it sure as hell works nowadays too.

Here is the locigal explanation why TA work:

Lets says the MSFT stock (Microsoft) trades for $100 for a long period of time. People buy and sell, so there are two camps out there, those who sold, and those who bought. Then the price falls to $80, and all the sellers are glad they got out at $100 and are reluctant to buy MSFT again. The buyers on the other hand, are paying very close attention to the market and decide that MSF is such a solid company, that they will not sell now at a loss. They decide to put it away and try to forget it.

Now some time later, MSFT price has picked up and is approaching $100. The people that has been in for the ride down to $80 is now paying very close attention again, and are on average a bit more inclined to sell at $100, since people really like to get out at break even when they can. The former sellers at $100 however, are not more inclined to buy back when MSFT is trading at $100 again, because they feel they almost got burned last time, and selling was the right move then, so buying is definately the wrong move now.

And wham, there you have it! It's a slight differentiation in buy vs sell pressure now, and $100 has become a resistance level for MSFT. Every time is reaches $100 in the future, it will experience a little added selling pressure that will stack the odds against that stock going up.

This is exactly why prices has a tendency to bounce at the same levels many time.

There are actually logical explanations for all technical patterns like trends, breakouts, fibonacci levels and ranges as well, but they are bit more complex then resistance.