Why are value investor types so rigidly opposed to TA?

[Mark1808]

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that technical trading shows no statistically significant risk-corrected out-of-sample forecasting power for almost all of the stock market indices."[5]

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Good point, but they may not have tested all indexes. If they found postive results for one you think they would say they found statistically significant results for XYZ index. At any rate the inability to quanitify TA techniques and test them make it difficult to prove that TA works.

The point about lottery winners is that just because you make money does not mean you have a market edge. Variance will produce gains for many people who do not necessarily have a market edge.

Anyone who is doing TA in a taxable account is paying significantly more taxes than a long term holder with equal gains. Its as though TA people where laying significant odds that their methods are better than long term value investing even though there is no proof its even equally as good.

[SuperWhale]

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i guess this really goes back to the #1 thing that spider said: wtf is TA??


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Off the top of my head TA is analysis of past "market data" such as price, volume, time of sales, quotes -- things provided by an exchange trading the product. Contrast this with fundamental analysis, which is concerned with the actual company, the economy, etc. My guess is that if you had a TA machine and could set it up to work it would not care if the instrument traded was cheese, a mega-corp, a barrel of oil, or a carbon credit.

[thehun69]

I thought we cleared up this issue and let it rest a ways back, but this keeps coming back again and back again. Allow me to clarify some points..

1)TA is the study of price movement/price action. That's it. It is not rocket science and I am unsure as to why people have such a difficult time understanding what it is and why they are overcomplicating the matter. Is it an exact science? Nope, just like FA isn't an exact science, for if it were, then I guess everyones picks would be right 100% of the time, which they are not. No one is always right.

2)This is a question for Desert Cat. You found a stock that is trading at 1/3 book value and think that it will take 2 years to get to full book value. My question is why two years? Why not one year? or five years? or even at all? One of the aspects of FA that turns me away from that kind of analysis is the fact that it completely ignore the driving force of the market...TRADERS. The only thing that will drive that price up, is buying pressure. That's it. Without buying pressure, that stock will not hit your projected bookvalue. Why will traders buy that stock? What is compelling them to do so? I have no clue, nor do I care. When I see buying or selling, it doesn't matter to me why they are doing so, I'm only concerned that they are buying and selling. Why, is extremely unimportant, from a TA perspective. The FA model has many incorrect assumptions, and the key assumption that people will act rationally is wayyyy offside. The model also assumes that EVERYONE will have this economic model and everyone will eventually realize the undervalue of that particular company. The fact is 1)everyone uses different methods of coming up with an economic value using different metrics analyyzing liquidity, profitability, etc, so their model may not be like yours 2) just because everyone has a particular model, doesn't mean that they will act "reasonably", people act in a million different ways for a million different reasons. I am not looking for their motivations, I just assess what is happening in the market. As an example, simply because a company has blowout earnings doesn't mean the stock will go up 10% on the open. Sometimes they have blowout earnings and the stock tanks hard. Ultimately traders, and only traders will make your stock go up, and traders buy stocks for millions of different reasons. If they don't have those economic models as you do, or if they do and don't believe in them, your stock will not go up magically because it is trading under book value.

3)Buffet.. let's just move beyond this. Who cares? Buffet doesn't like TA? Wow, big surprise? But so what? Just because he doesn't understand it doesn't invalidate it on any level. There are many private investors who do extremely well using TA? Why aren't they billionaires, because those billions you see made by the typcial Forbes FA billionares are a function of creating an investment company, attracting investors and all the work and stress and pressures and issues that are related to that buisiness and not as a result of personal investing. Some people just want to trade and don't have the ability to market themselves and raise capital, nor want to. Make no mistake, Buffet is a billionaire through Berkshire, NOT becaue through investing personal funds 40 years ago. It started with him raising $500,000 and moving from there and rasining more money. Those billions were a result of raising a ton of money and from that base investing well with it, and not some guy that started with a paltry $10,000 portfolio.

Lastly, at the end of the day, I tell people this...trade what you know and what you are comfortable with. I am not here to convince you that TA is the best and FA is the worst. However TA is the best...FOR ME. I am comfortable with it, understand the logic behind it and do well with it given my investment objectives and time frames in which I trade, which is typically short term trading (days to a week max). This would not work well with people who are FA oriented which is more the long haul.

Hopefully we can all put an end to this pissing contest and just have threads which will be TA oriented and others FA oriented..it's all about making money...

THE HUN.

[DcifrThs]

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I thought we cleared up this issue and let it rest a ways back, but this keeps coming back again and back again. Allow me to clarify some points..

1)TA is the study of price movement/price action. That's it. It is not rocket science and I am unsure as to why people have such a difficult time understanding what it is and why they are overcomplicating the matter. Is it an exact science? Nope, just like FA isn't an exact science, for if it were, then I guess everyones picks would be right 100% of the time, which they are not. No one is always right.

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the question is what constitutes price action/price movement?

is it TA to backtest strategies regarding how certain stocks/sectors etc. react to various changes in various variables over time? the indicators there are their "price movements" or "price actions" as related to possibly fundamental changes in either the economy, other stock prices, other market movements (fixed income, gold, etc.).

some of those are clearly fundamental but some aren't. those that aren't you can't clearly define as TA or FA. thats what i have issue with. i'm not needlessly complicating this here i don't think. would you classify AQR as a technical analysis shop?

look at the research they do here: AQR Reserach Page

some of that is clearly fundamental and some is clearly NOT fundamental (in terms of valuing stocks etc.). so is the stuff not fundamental (momentum strategies), TA?

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2)This is a question for Desert Cat. You found a stock that is trading at 1/3 book value and think that it will take 2 years to get to full book value. My question is why two years? Why not one year? or five years? or even at all? One of the aspects of FA that turns me away from that kind of analysis is the fact that it completely ignore the driving force of the market...TRADERS.

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actually, liquidity is the driving force of the market. traders are its vehicle.

also, buying pressure comes from tons of areas, many of which operate through traders. saying traders are the ones moving the market is like saying the droplets of water coming out of a damn are the driving force of the river beneath...nevermind the fact that the damn is the actual thing driving the force of the river beneath.

similarly, the buying pressure comes from somewhere. traders are simply the expression of it in the market imo.

there is definitely no doubt though that liquidity, not so much information, drives prices. those seeking it are more concerned with time rather than price, those supplying it are more concerned with price rather than time.

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The only thing that will drive that price up, is buying pressure. That's it. Without buying pressure, that stock will not hit your projected bookvalue. Why will traders buy that stock? What is compelling them to do so? I have no clue, nor do I care. When I see buying or selling, it doesn't matter to me why they are doing so, I'm only concerned that they are buying and selling. Why, is extremely unimportant, from a TA perspective. The FA model has many incorrect assumptions, and the key assumption that people will act rationally is wayyyy offside.

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people acting rationaly is not an assumption of FA ... if people were acting rationally there would be no FA.

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The model also assumes that EVERYONE will have this economic model and everyone will eventually realize the undervalue of that particular company. The fact is 1)everyone uses different methods of coming up with an economic value using different metrics analyyzing liquidity, profitability, etc, so their model may not be like yours 2) just because everyone has a particular model, doesn't mean that they will act "reasonably", people act in a million different ways for a million different reasons. I am not looking for their motivations, I just assess what is happening in the market. As an example, simply because a company has blowout earnings doesn't mean the stock will go up 10% on the open. Sometimes they have blowout earnings and the stock tanks hard. Ultimately traders, and only traders will make your stock go up, and traders buy stocks for millions of different reasons. If they don't have those economic models as you do, or if they do and don't believe in them, your stock will not go up magically because it is trading under book value.

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you are forgetting one major thing, the fact that FA is tried, tested, and studied with conclusive results that state without a doubt that prices of stocks chosen by good fundamental analysis converge to their estimated price over time.

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3)Buffet.. let's just move beyond this. Who cares? Buffet doesn't like TA? Wow, big surprise? But so what? Just because he doesn't understand it doesn't invalidate it on any level. There are many private investors who do extremely well using TA? Why aren't they billionaires, because those billions you see made by the typcial Forbes FA billionares are a function of creating an investment company, attracting investors and all the work and stress and pressures and issues that are related to that buisiness and not as a result of personal investing. Some people just want to trade and don't have the ability to market themselves and raise capital, nor want to. Make no mistake, Buffet is a billionaire through Berkshire, NOT becaue through investing personal funds 40 years ago. It started with him raising $500,000 and moving from there and rasining more money. Those billions were a result of raising a ton of money and from that base investing well with it, and not some guy that started with a paltry $10,000 portfolio.

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interesting...so buffet hasn't made many more billions since he stopped taking money from other people? i don't think berkshire has had any offerings anytime recently...not to mention he should get MORE credit for starting with billions and, through investing, turning it into many many many more billions. that is far harder than starting with $10k or $1mil. so please show where buffet continued to take money from others similar to hedge funds (what you say is like a hedge fund growing through new investments rather than appreciation of its current capital stock).

and as you said, lets move beyond buffet. how about now you deal with benoit mandelbrot...one of the smartest people of the 20th century, friend to and admired by albert einstein for his deep insights...founder of much of the mathematics behind much of chaos theory (fractal geometry)...and creator of the multifractal model of price changes.

it was with that last model that he fooled TAs. how do you explain that his simulations were so good that veteran technical analysts were pointing him towards all o fthe price action you speak of? how, if traders are the ones driving the market in all cases, can their actions be so amazingly closely be described by an entirely random process?

brownian motion and all other financial estimations don't fool TAs...but this one does. it has every single aspect of real price charts but is driven by a completely random process.

how can you explain that? to me it seems like TA can work, but its foundation can only be explained, imho, by luck in using its indicators as proxies for the psychological effects that prices, price changes, volume changes, have on future price changes.

the actual logical foundation of TA though, thanks to mandelbrot, has, in my mind, been exposed as nothing.

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Lastly, at the end of the day, I tell people this...trade what you know and what you are comfortable with. I am not here to convince you that TA is the best and FA is the worst. However TA is the best...FOR ME. I am comfortable with it, understand the logic behind it and do well with it given my investment objectives and time frames in which I trade, which is typically short term trading (days to a week max). This would not work well with people who are FA oriented which is more the long haul.

Hopefully we can all put an end to this pissing contest and just have threads which will be TA oriented and others FA oriented..it's all about making money...

THE HUN.

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true, it is.

Barron

[mrbaseball]

We blur the line again! Trading and investing are two different things often with very different timeframes. TA works very good in a trading environment. I'm not so sure it's all that effective for anything with a very long time horizon (a couple of months at best). My personal time frame is from 10 seconds on daily scalps to 2 months or so on option spreads in my trading. I use technicals exclusively for these activities. For my long term investments I may use some sort of technical for timing an entry or exit or when to apply a hedge but for the most part ignore stuff I would concentrate on when trading. Fundamentals seem much more important in the longer term.

[DesertCat]

Hun,

Buffett increased his net worth to $30m or so through fees from his partnership. I would guess his initial investment in Berkshire was most of that net worth. He's taken no fees over the 45 years or so he's been CEO and his pay has always been so small as to be nominal ( I think $100k a year last I heard). So Berkshire is a pretty good testament to the power of FA over long periods.

And value investments that require the whims of the market to recognize value are often called "Value Traps". I don't buy investments that require traders to trade up my stock to fair value, my picks always have catalysts. A catalyst could be as simple as increasing earnings over time, if the market assigns a too low PE for a stock and it doubles earnings, the stock would double even if the PE stays the same.

In the case of my example I am paying $14 for stock in a company that mgmt intends to sell for $50 per share. It all involves finding the right buyer who can monetize a very valuable asset without adverse tax consequences. They could find one tommorrow, or it may take a few years, they may grow in value during the wait and sell it for $70 per share. You can see how this example doesnt require the market at all to monetize my investment, aside from the unbelievable entry price it is giving me to create my position.

[thehun69]

Barron, as always, great posts,,now let's get to the meat..

1)Price action is price action. Lookit, there are many ways to skin a cat here, just as there are many ways in which a fundie looks at a company, is it overvalued based on price/book, or price/sales, or doing debt analysis, there are many different tools in a fundie's toolbox to look at a company and assess what their investment decision is regarding that particular company. The same feeling goes for the TA side. There are thousands of different tools and studies you can do and have it semantically considered as TA. Here is the definition: TA is the valuation of stock price based SOLELY on the study of stock price (btw, that is how it should be defined, whatever wikipedia or any other reference source has, shouold be updated to this). Any study of price is TA. As I see it, TA is based on price action regardless of outside fundamental forces and factors. Now, yes you are right, there are hazy areas where the two collide, but once can easily say that that hazes the FA definition as much as it does the TA definition.

2)"similarly, the buying pressure comes from somewhere. traders are simply the expression of it in the market imo."

Agreed. Now the question is WHY ARE THEY BUYING? To that, there is no predictive answer. That was my comment to Dessert in the sense that he felt that for whatever reason, people would miraculously come to their senses in a couple of years time and realize that this stock is trading significantly underbook, here comes the buying pressure, and Dessert makes a nice profit as the price is driven up to par. My critique of that point is the fallacious assumption that people would realize the stock's undervalued quality (which would have to be based on a clear consensual and mutually agreed market model, which is a wonderfully amazing assumption)and then flock to it. I brought up that point for the purpose of demonstrating that as a TA I don't care why people buy stocks. I only care what the stock action is currently demonstrating. I don't think it is reasonable to assume that everyone would agree on a valuation based on some economic model and then flock there, the price action on the charts show you EXACTLY the valuation that the public assumes.

3)I have seen tests done on FA and tests done on TA. My biggest qualm of test done on TA is that they are done by people who have absoluetely no clue how to effectively use TA. I have seen analysis on simple moving crossovers, and such, but the problem is that with TA, it is not all encompassing, that is the TA that works in one market will get you killed in another. That is, some markets tend to trend nicely, other are inherently choppy and will trade in channels (yes just like that gorrilla on tv). To use a moving average study over choppy markets will get you whipsawed and your lunch chewed out. Just like using an oscillator in a trendy market will be extremely costly. These studies are all encompassing and thus seem ineffective.

4)With Buffet, yes, let's move on. While there were no recent offerings, the point I was brining up was that Buffet along with the other famously wealthy fundies have shown strong results with their trading, but their billionaire status is a function of the trading and as a function of their investment company and having a crapload of shares of those companies. Yes, he did grow those shares, but he wasn't some joe blow that took a td ameritrade account from peanuts to bling.

5)As for Mendle..this is one of those fooled by randomness points. To be honest, I haven't seen the documentation, and don't know much about this, but I will read into it in order to give a better formed opinion.

6)Lastly, I really think this contention should be put to rest and let's move on with our lives, trade the way we like, be wealthy and happy.

THE HUN.

[thehun69]

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Hun,

Buffett increased his net worth to $30m or so through fees from his partnership. I would guess his initial investment in Berkshire was most of that net worth. He's taken no fees over the 45 years or so he's been CEO and his pay has always been so small as to be nominal ( I think $100k a year last I heard). So Berkshire is a pretty good testament to the power of FA over long periods.

And value investments that require the whims of the market to recognize value are often called "Value Traps". I don't buy investments that require traders to trade up my stock to fair value, my picks always have catalysts. A catalyst could be as simple as increasing earnings over time, if the market assigns a too low PE for a stock and it doubles earnings, the stock would double even if the PE stays the same.

In the case of my example I am paying $14 for stock in a company that mgmt intends to sell for $50 per share. It all involves finding the right buyer who can monetize a very valuable asset without adverse tax consequences. They could find one tommorrow, or it may take a few years, they may grow in value during the wait and sell it for $70 per share. You can see how this example doesnt require the market at all to monetize my investment, aside from the unbelievable entry price it is giving me to create my position.

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Hi Dessert,

Nice to hear from you again as well. Yes, Berkshire has done well with a value investment philosophy, I don't want to go down that road. I brought it up because invariably someone will say, hey look at these billionaires that got that way through value investing. My point is, is that, yes they are successful investors and created a tremendous return, but their starting capital was significantly huge and to keep that in mind.

Trading catalysts - now if management is deciding to sell for $70 and you are in at $14, then yes, traders are not involved here as this is one of those things where you wake up Monday morning, turn on CNBC, with the newsflash across the screen and there is the big pop. I do take issues with increasing earnings as a catalyst, because again, some people have different presumptions about those things. I have seen time and time again companies that are growing, and then have huge blowout earnings, but get slammed. Sometimes the expectation of even greater earnings were not met.

At the end of the day, man, it works for you. You are a long term investor and this is a tool that you have found success with. I'm a trader. I buy and sell short term, and FA is uselss in that arena. FA will not give you any indication or predictive help as to why a $50 stock moved up $1.34 today and the company didn't announce a thing. TA will be a more useful guide in that arena.

THE HUN.

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If there's one thing I noticed while browsing these boards for the last few years is that very few people understand what both TA and FA really are. There are a lot of misconceptions on both ideas from the practitioners of both sides. I think being focused on one side makes it difficult to "get it" because it is fundamentally very different from your core philosophy. I think this is readily seen when TAers make comments on Buffett since they probably don't follow him closely and/or only get exposure through him on WSJ, CNBC, etc., and surprisingly those news outlets tend to not always depict an accurate picture of who he really is (e.g. rumors of him buying a stake in Countrywide confused speculation that he might just be buying a loan servicing unit from them). His "style" has likely changed over time from pure-Graham during the partnership days to now 85% Graham and 15% Fisher.

I find FA much more intuitive, whereas my friends are trading with TA big time. Value investors oppose TA so rigorously since it has nothing to do with their core philosophy. The same can be said about anything that fundamentally disagrees with the core of TA. Both are profitable strategies.

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What I find interesting is Rentec Institutional Equity Fund that models fundamental factors and holds for much longer periods relative to Medallion.