Fundamental View
Recent feedback:
“I have been a “lurker” [at the web sites] for some time now. I seem to recall someone writing in one time to defend fundamental analysis as the only way to invest. The answer was that fundamental analysis might tell you when to buy but didn’t tell you how much to buy or when to sell. Somehow, that answer didn’t seem to satisfy me, but I couldn’t put my finger on the reason why. You see, I am a fundamental analyst and portfolio manager. I put myself squarely in the Graham and Dodd camp, along with other such luminaries as Sequoia Fund, Warren Buffett, Longleaf Partners and Tweedy Brown. I just purchased the Michael Covel book Trend Following and have started reading it with much interest. As I was plowing through the first chapter, it began to occur to me that I am a closet trend follower, as are many of my value oriented colleagues. How did I arrive at that conclusion? Let’s go back to the answer that was given about fundamental analysis. That answer would certainly dispel any myths about trend following being better than fundamental analysis if it were truly the case that one ran the numbers, bought a stock and forgot about it. Trouble is, it doesn’t work like that. You get new information about your purchase at least every quarter. At that point, any money manager worth his salt is re-evaluating his holdings in light of this new information. Sometimes you revalue your holdings upwards, other times, downwards. Some change very little. Next look at current price versus the newly calculated valuation. If the risk/reward ratio is sufficient, buy more. If it’s not, hold what you have. If the valuation has gone down enough or the price risen sufficiently, you sell. It is interesting to note that, currently, most of the Graham and Dodd investors are holding a significant portion of their assets in cash (myself included). This is because there is nothing that meets our value criteria to buy and, of the holdings that we held, they have become overvalued enough to take profits on. So trend following and fundamental analysis are not mutually exclusive as some of you might think. If things are done properly, good fundamental analysts will follow a trend. As for your argument on position sizing (’fundamental analysis won’t tell you how much to buy’), you are correct in that statement. But trend following won’t tell you that either. Position sizing is a personal choice and is a necessary part of ANY competent investment program. The decision to add to positions that offer better rewards and sell out of positions with declining or negative rewards is critical. I look forward to finishing Mr. Covel’s book. I am still intrigued by trend following techniques. I do not argue with the successes of those who follow the techniques. I think the polarizing element is the perception that the only way to trend follow is to use technical analysis and technical analysis seems like so much hocus-pocus to so many folks (more often than not, with good reason).”
Alan M., CFA
