Bruce Greenwald is a well-known investor and academic who for many years has taught a class at Columbia Business School on the subject of value investing. He is also the author of “Value Investing: From Graham to Buffett and Beyond.” The following is an excerpt from a lecture he gave at Columbia on different types of short-term investing and why they are difficult to pull off.
Short-term fundamental investing
People often think about short-term investing as trading and, to a certain extent, it is. However, unlike trading off of technicals (which we will talk about later), some people try to put on short-term trades based off of fundamental information:
“The most common approach to short-term investing, at least in terms of the research disseminated, is what might be called short-term fundamental investing. What you do is forecasted either a quarter out or a year or two years out, some appropriate quantity to do with the companies securities that you will be buying. Most commonly, of course, that is earnings. Then you compare your forecast to the consensus either as it is apparent in surveys or as you can infer it from stock price level of that security or the bond price level of that security.
And if you think your forecast is more optimistic than the implied consensus, you buy on the theory that when the news is revealed, you turn out to be right and everyone else turns out to be wrong. The stock is going to go up, and you will make money. If the opposite is true, the more pessimistic estimate becomes apparent that you are right and everybody else is wrong…the stock will go down.”
Personally, I think forecasting earnings is a sucker's game, essentially indistinguishable from gambling. Every good trader I know of made it a rule to never have a position in an index going into an important announcement (earnings, central bank rate decision or other such fundamental event) because they recognized that, as an outsider, your chances of guessing correctly are quite low. Greenwald agrees:
“But notice what has got to happen to do this successfully, you must have information that no one else has. The classic investor of this sort is my dentist, who is a terrific dentist and a terrible investor. His idea of short-term information is the demographics of the U.S. population. I guarantee you he is not an expert in the use of that information.”
Greenwald also devoted some of the discussion to technical investing:
“Then there is a whole large school of technical investing. It is a school where all you look at is trading patterns in the market. Momentum is the simplest of those approaches. If prices are going up, then prices will continue going up. Some people look at complicated price patterns and make short-term price projections. If they indicate prices will be higher, they buy and vice versa. So there are plenty of alternative approaches to investment.”
Although he does not explicitly criticize technical investing, it is clear from his position as a committed long-term value investor that he does not think too highly of it. In particular, the practice of looking at trendlines and patterns is particularly fraught with problems. People tend to look at charts and retroactively identify patterns they think would have been obvious to spot in the moment.
The truth of the matter is people see what they want to see - a bull will see a coming breakout, whereas a bear will see a top in the price. In my experience, the successful technical traders worked almost exclusively off of order flow - seeing where the demand in the market is - rather than off esoteric strategies that rely on pattern recognition.
In any case, long-term-focused investors should not be overly concerned with order flow on a day-to-day basis, though I do believe there is value in researching which professional money managers may be holding positions in your investment of choice.
Disclosure: The author owns no stocks mentioned.
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