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Strategies & Market Trends : Market Gems-Trading Strong Earnings Growth and Momentum -- Ignore unavailable to you. Want to Upgrade?

To: Dave Gore who wrote (5461)	2/28/2001 12:57:04 PM
From: Lane Hall-Witt	Read Replies (1) \| Respond to of 6445

Dave-- Regarding fundamental analysis based on P/E, P/E/G, debt ratios, book values, and the like: I like your sentiment here, and I approve to the degree that I myself like to do fundamental analysis and evaluate companies as companies, rather than simply as names or ticker symbols. However, it's obviously important to keep an eye on the broader logic of the market. The question we all face is: how do our fellow traders justify their buy and sell decisions to themselves? Once we figure this out, then we have to ask: how can I detect what they're going to do before they have done it? At certain very select times in market history, traders have made their buy and sell decisions on the basis of fundamental analysis of individual companies. At these times, the key to the market was to perform fundamental analyses of companies that the rest of the market had overlooked, but would eventually discover. The thing is, at many other times in market history, the criteria for making buy and sell decisions have been very different. In 1998, all you had to do was buy dot-coms and you could be sure that others would follow you in: there was always a bigger sucker waiting in line. With the extreme volatility of the past year, chart-reading has become the only way to play the market effectively. Will fundamental analysis become the key to the tech market going forward? Maybe -- I hope so, too. But from a traders's perspective, we can't begin to think that this is the way it ought to be, and so plan our strategies accordingly. We have to wait until the market tells us what it's basis for decision-making is going to be, and then respond accordingly in our own decision-making. I know that you know all this, but I write this way because I have felt the same way myself. Why doesn't this damned market just come to its senses and start valuing companies properly? What a waste of time to read all of those books by Benjamin Graham! But, no, it wasn't a waste of time. It's just that we always have to wait on the market to tell us when those techniques will actually work, because there certainly are times when they don't. (Just remember back a couple of years to all of those stupid articles wondering whether Warren Buffett had "lost his touch" as an investor! Of course, he was still the most creative company analyst out there; it's just that the market was buying names, not companies.) A related theme: it's important to bear in mind that it is inefficiency that makes markets, not efficiency. One reason the market is so tough right now is that we're all looking at the same charts in real time, so we're all trying to get in and get out of positions at the same time. We'd have the same problem in a market driven rigorously by fundamental analysis. We all have access to the same information and can run the numbers almost instantaneously through screens, we'd ultimately confront the same problem of climbing all over one another to get in and out of the same trades. This is just to say that general predictability isn't really what we should want from the markets. What we always need is a little edge -- a little inefficiency that we can exploit -- that gets us in a little lower and out a little higher than the next trader. It's tempting to want predictability in such volatile and uncertain markets, but this really would not ultimately help us as individual traders.