Skip to main content

Charts Don't Lie, People Do

September 22, 2012

I came across an interesting blog post this week that reminded me a lot about why I became a technician in the first place. I hit that fork in the road early in my career when I realized that I didn't know a damn thing about making money in the market. "OK JC, we gotta learn something", I told myself. So do I go the route of fundamental analysis and force myself to believe that the data we're analyzing is the truth? Or do we study pure price action, where no one can argue the data is incorrect or false in any way?

If xyz closed at $12, then guess what? It's worth 12. Why do I know that? Because buyers and sellers world wide took all of the known information available and concluded that it was worth 12. That's what one side paid for it and another side sold it for. So I don't want to hear about your cash flows and multiples and all that nonsense that means absolutely nothing when it comes to managing risk. Besides, all of that "fundamental" analysis is done using numbers that you can't fully trust anyway. Who knows if they're right? No one, and that's a problem.

The post that reminded me of this dilemma came from The Zikomo Letter. Zikomo means "Thank You" in Africa, which I think is appropriate because I am, and we all should be, "Thankful" for this friendly reminder about which data we can fully trust and not trust. Here are a few gems I pulled from the post:

"Let us start with company-provided information. If the history of public corporations tells you anything, it is that anything a corporation tells you should be treated as a lie. Sometimes it is deliberately misleading, sometimes it obscures the truth, and sometimes it just lies to your face. If you do not believe me, then I point you to some of those who were caught: Enron and Lehman Bros stick in the mind, but the list is long.

Do not kid yourself that these are the rogues in an otherwise healthy bunch: every public corporation twists and tortures their information to meet their objectives. In a previous life I was a company auditor, and I can attest that there is plenty of scope for maneuver within the law.

...Just as pertinent are the revisions. Fundamental data is often revised. Corporations restate their earnings. GDP and employment figures are adjusted materially months later. If data can be revised long after the fact, it makes little sense to base investment decisions on the originally announced variable.

...Every computer programmer knows that if you input garbage, you output garage. Doing analysis based on discounted cash flows, or price/earnings multiples or supply/demand components is all well and good, but if you cannot trust the data, you cannot trust the output it produces.

...I use fundamental analysis every day. It can be an important part of the trading process. However, I treat all fundamental data with a strong pinch of cynicism, a healthy sense of skepticism and a highly-refined BS Detector. When placing my own money at risk, I think it is better to see the world as it is, rather than how I might want it to be."

I think it was a great post and finishes up on an important note. It's not that this fundamental data is completely irrelevant. It's just that you need to be careful how much validity you give something that you can't fully trust. Price however is pure. No lies. No BS. If xyz is at 12, then guess what ladies and gentlemen? It's worth 12. Period.

Go check out the post in full at The Zikomo Letter

 

Filed Under: