Re: [CANSLIM] Devil's Advocate: Why bother with fundamentals?

From: "Katherine Malm" <kmalm@earthlink.net>
Subject: Re: [CANSLIM] Devil's Advocate: Why bother with fundamentals?
Date: Wed, 19 Dec 2001 10:46:48 -0600
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First, just some business regarding the question...

I originally posted this question early Sunday morning under the heading
"Devil's Advocate..." After 2 attempts, it did not show up in my inbox. I
sent an email directly to Tom asking him if he had received it, and he had
not. I then sent a test message to see if things were coming through. As the
test showed up immediately, I assumed that my subject title which included
such an objectionable word as "devil" had gone into the great censor box in
cyberheaven. I reworded the subject line to "Point of View..." and sure
enough, the question posted to the list. I see that the original post from
early Sunday morning finally showed up late yesterday, so my apologies if it
seems that I am starting a new thread on this. I also hope that by now, my
rather lengthy post from Monday evening in answer to my own question has
shown up on the
list. We seem to be dropping messages here and there for some inexplicable
reason.

So, jans. I have to say that I would agree with you completely. The fact
that I have explicitly limited the question to a CANSLIM universe shows that
we are making assumptions about the kinds of stocks we are choosing.

>>>  Do you believe reliance on merely technical indicators and chart
patterns
> would have done better than CANSLIM?

I think that this can be answered in 2 ways. First, what time frame are we
talking about? Is it still intermediate term? Second, done better for whom?
I think that this is the more important question. Style, in the end, is
about personal preference. I was drawn to CANSLIM because I was originally
drawn to fundamental analysis but couldn't always translate it into solid
returns. I learned through this style that timing entry and exit based on
supply/demand in the marketplace was critical to generating consistent
returns over time. I am not personally drawn to technicals alone because it
reduces investing to a probability exercise. I really like the idea that
when you own a stock, you really are owning "a piece of a company." If I had
my druthers, I'd just buy the whole darn thing. But I am not Buffet, and I
can't buy big enough chunks of the company to get a seat on the board. Maybe
one day I will and I will be very, very happy. But for the moment, I realize
my limited resources reduce my stock holdings to something only slightly
different than owning a piece of paper, which, by the way, I never even see.

>>.  I imagine that relying only on technical indicators (with price/volume
movements, ie. stock patterns) would have 1) given as many false signals as
CANSLIM and 2) done as badly as using the CANSLIM techniques (with its
dependence on outstanding fundamentals)  However, it would be interesting to
see some empirical evidence on this: Do you believe reliance on merely
technical indicators and chart patterns would have done better than CANSLIM?
Or would you believe that it is the market rather than the CANSLIM technique
that allows for so many failure (and some unexpected successes, whether
using CANSLIM or not)?<<

These are all incredibly important questions that you ask and I do not know
the answer. If I had chosen another fork in the road and joined the PhD
program in Finance instead of starting my own business, these would have
been the very things I would have researched. I'm sure there are people out
there who are doing just this, but I have lost the habit of reading the
Journal of Finance and have to rely on more anecdotal evidence from
experience and idea exchange. My gut feel on this is that technicals are a
proxies for human action and reaction. In *most* cases, we can assume that
people will react a certain way in a given circumstance. For example, when a
stock in an underlying uptrend moves away from the intermediate term trend
and starts to go too far too fast, we assume that there will be some people
who will perceive it as "going too far too fast" and sell it or short it.
That action brings the stock back to the underlying intermediate term trend.
But nothing has changed fundamentally about the company in this short time
period. It's just perception about price and the resulting supply/demand.
But every once and a while, these things confound us. Just look at INVN
recently. Did it make sense that it went parabolic? I don't think so. Did it
continue to go up in price *despite* the fact that early in that parabolic
rise we thought the probability that it could continue the move for another
week was very low? Did it make sense for BREL to break out of that 7 week
C&H a few days ago? Did it make sense that it immediately crashed and
burned? Back to probabilities. We cannot separate stocks from the market any
more than we can separate stocks from companies. I think in the end it's
about a personal blend of fundamentals and technicals in a way that is
comfortable for an individual's risk tolerance, time available for investing
and personal preferences. There *are* people who can successfully blend
fundamentals and/or technicals in a way to consistently pull profits from
the market and that is evidence that convinces me that there is no one
"best" way to invest. But, there are pathetic few who can do this
consistently over time. That's why Schwager has only written three Market
Wizards books instead of a hundred.

Katherine



- ----- Original Message -----
From: <Spencer48@aol.com>
To: <canslim@lists.xmission.com>
Sent: Wednesday, December 19, 2001 10:09 AM
Subject: Re: [CANSLIM] Devil's Advocate: Why bother with fundamentals?


> Katherine:
>
>      The answer to your question is included in your question, viz. "...A
> typical CANSLIM/Intermediate term move..." is made up of CANSLIM
> stocks-otherwise it would not be a CANSLIM move.  CANSLIM stocks are
composed
> of stocks with outstanding fundamentals AND outstanding technical chart
> patterns.
>
>      My previous answer said that we have only so many resources to invest
in
> the stocks that appear about to take off.  I imagine that relying only on
> technical indicators (with price/volume movements, ie. stock patterns)
would
> have 1) given as many false signals as CANSLIM and 2) done as badly as
using
> the CANSLIM techniques (with its dependence on outstanding fundamentals).
>
>      However, it would be interesting to see some empirical evidence on
this:
>  Do you believe reliance on merely technical indicators and chart patterns
> would have done better than CANSLIM?  Or would you believe that it is the
> market rather than the CANSLIM technique that allows for so many failure
(and
> some unexpected successes, whether using CANSLIM or not)?
>
> jans
>
>
>
> In a message dated 12/18/2001 8:32:53 PM Eastern Standard Time,
> kmalm@earthlink.net writes:
>
> << If a typical CANSLIM/Intermediate term move in a stock lasts only a few
> weeks, and in good markets, only a few months, why bother selecting
portfolio
> candidates using any sort of fundamental analysis? Returns in this time
> period are strictly based on price movement and can be maximized based on
> technical indicators and price/volume action alone. >>
>
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