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

From: John Maycock <jmvan@shaw.ca>
Subject: RE: [CANSLIM] Devil's Advocate: Why bother with fundamentals?
Date: Wed, 19 Dec 2001 06:22:32 -0800
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Hi Katherine:
It is a good question and got me thinking overnight about the dilemma=
.

In a purely analytical sense, I believe the answer lies in the distri=
bution
of expected returns. The longer you hold a basket of stocks, the more=
 likely
you are to have a triple digit percentage winner on your hands. It ta=
kes
time for big winners to emerge, the =93Patience=94 part of a system. =
In
following an intermediate term system, eg. CANSLIM, fundamental analy=
sis had
been proven to be an effective filter that increases ones chances of
selecting these big winners.

A few days ago, I posted what was obviously an embarrassing question
regarding win/loss ratios and relative size of the winners to the los=
ers. My
point was that in a CANSLIM system most of the gains we will make com=
e from
less than 10% of the basket. I am learning it is very important in an
intermediate time frame system such as CANSLIM to have a method that =
holds
on to potential big winners. Really big winners take time to develop.

A short-term system must have a higher win/loss ratio and will probab=
ly have
a smaller gain per trade, because these big winners will be cut off b=
efore
their prime. It goes back to an individual=92s personal timeframe and
personality. In closing here are some comments from William Eckhardt:

=93One common adage on this subject that is completely wrongheaded is=
: You
can't go broke taking profits. That's precisely how many traders do g=
o
broke. While amateurs go broke by taking large losses, professionals =
go
broke by taking small profits. The problem in a nutshell is that huma=
n
nature does not operate to maximize gain but rather to maximize the c=
hance
of a gain. The desire to maximize the number of winning trades (or mi=
nimize
the number of losing trades) works against the trader. The success ra=
te of
trades is the least important performance statistic and may even be
inversely related to performance. ...The market does behave very much=
 like a
tutor who is trying to instill poor trading techniques. Most people l=
earn
this lesson only too well...Since most small to moderate profits tend=
 to
vanish, the market teaches you to cash them in before they get away. =
Since
the market spends more time in consolidations than in trends, it teac=
hes you
to buy dips and sell rallies. Since the market trades through the sam=
e
prices again and again and seems, if only you wait long enough, to re=
turn to
prices it has visited before, it teaches you to hold on to bad trades=
. The
market likes to lull you into the false security of high success rate
techniques, which often lose disastrously in the long run. The genera=
l idea
is that what works most of the time is nearly the opposite of what wo=
rks in
the long run.=94

William Eckhardt, interviewed in The New Market Wizards: Conversation=
s With
America's Top Traders  Schwager (1994)

John
- -----Original Message-----
=46rom: owner-canslim@lists.xmission.com
[mailto:owner-canslim@lists.xmission.com]On Behalf Of Katherine Malm
Sent: Sunday, December 16, 2001 5:27 AM
To: canslim@lists.xmission.com
Subject: [CANSLIM] Devil's Advocate: Why bother with fundamentals?

Proposed:
If a typical CANSLIM/Intermediate term move in a stock lasts only a f=
ew
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.

Thoughts pro/con?

Katherine



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<p class=3DMsoNormal><span class=3DEmailStyle15><font size=3D2 color=
=3Dnavy face=3DArial><span
style=3D'font-size:10.0pt;mso-bidi-font-size:12.0pt;font-family:Arial=
'>Hi
Katherine:<o:p></o:p></span></font></span></p>

<p class=3DMsoNormal><span class=3DEmailStyle15><font size=3D2 color=
=3Dnavy face=3DArial><span
style=3D'font-size:10.0pt;mso-bidi-font-size:12.0pt;font-family:Arial=
'>It is a good
question and got me thinking overnight about the dilemma.<o:p></o:p><=
/span></font></span></p>

<p class=3DMsoNormal><span class=3DEmailStyle15><font size=3D2 color=
=3Dnavy face=3DArial><span
style=3D'font-size:10.0pt;mso-bidi-font-size:12.0pt;font-family:Arial=
'><![if !supportEmptyParas]>&nbsp;<![endif]><o:p></o:p></span></font>=
</span></p>

<p class=3DMsoNormal><span class=3DEmailStyle15><font size=3D2 color=
=3Dnavy face=3DArial><span
style=3D'font-size:10.0pt;mso-bidi-font-size:12.0pt;font-family:Arial=
'>In a purely
analytical sense, I believe the answer lies in the distribution of ex=
pected
returns. The longer you hold a basket of stocks, the more likely you =
are to
have a triple digit percentage winner on your hands. It takes time fo=
r big winners
to emerge, the &#8220;Patience&#8221; part of a system. In following =
an intermediate term
system, eg. CANSLIM, fundamental analysis had been proven to be an ef=
fective
filter that increases ones chances of selecting these big winners. <o=
:p></o:p></span></font></span></p>

<p class=3DMsoNormal><span class=3DEmailStyle15><font size=3D2 color=
=3Dnavy face=3DArial><span
style=3D'font-size:10.0pt;mso-bidi-font-size:12.0pt;font-family:Arial=
'><![if !supportEmptyParas]>&nbsp;<![endif]><o:p></o:p></span></font>=
</span></p>

<p class=3DMsoNormal><span class=3DEmailStyle15><font size=3D2 color=
=3Dnavy face=3DArial><span
style=3D'font-size:10.0pt;mso-bidi-font-size:12.0pt;font-family:Arial=
'>A few days
ago, I posted what was obviously an embarrassing question regarding w=
in/loss
ratios and relative size of the winners to the losers. My point was t=
hat in a
CANSLIM system most of the gains we will make come from less than 10%=
 of the
basket. I am learning it is very important in an intermediate time fr=
ame system
such as CANSLIM to have a method that holds on to potential big winne=
rs. Really
big winners take time to develop. <o:p></o:p></span></font></span></p=
>

<p class=3DMsoNormal><span class=3DEmailStyle15><font size=3D2 color=
=3Dnavy face=3DArial><span
style=3D'font-size:10.0pt;mso-bidi-font-size:12.0pt;font-family:Arial=
'><![if !supportEmptyParas]>&nbsp;<![endif]><o:p></o:p></span></font>=
</span></p>

<p class=3DMsoNormal><span class=3DEmailStyle15><font size=3D2 color=
=3Dnavy face=3DArial><span
style=3D'font-size:10.0pt;mso-bidi-font-size:12.0pt;font-family:Arial=
'>A short-term
system must have a higher win/loss ratio and will probably have a sma=
ller gain
per trade, because these big winners will be cut off before their pri=
me. It
goes back to an individual&#8217;s personal timeframe and personality=
. In closing
here are some comments from William Eckhardt: <o:p></o:p></span></fon=
t></span></p>

<p class=3DMsoNormal><span class=3DEmailStyle15><font size=3D2 color=
=3Dnavy face=3DArial><span
style=3D'font-size:10.0pt;mso-bidi-font-size:12.0pt;font-family:Arial=
'><![if !supportEmptyParas]>&nbsp;<![endif]><o:p></o:p></span></font>=
</span></p>

<p class=3DMsoNormal><span class=3DEmailStyle15><font size=3D2 color=
=3Dnavy face=3DArial><span
style=3D'font-size:10.0pt;mso-bidi-font-size:12.0pt;font-family:Arial=
'>&#8220;One
common adage on this subject that is completely wrongheaded is: You c=
an't go
broke taking profits. That's precisely how many traders do go broke. =
While
amateurs go broke by taking large losses, professionals go broke by t=
aking
small profits. The problem in a nutshell is that human nature does no=
t operate
to maximize gain but rather to maximize the chance of a gain. The des=
ire to
maximize the number of winning trades (or minimize the number of losi=
ng trades)
works against the trader. The success rate of trades is the least imp=
ortant
performance statistic and may even be inversely related to performanc=
e. ...The
market does behave very much like a tutor who is trying to instill po=
or trading
techniques. Most people learn this lesson only too well...Since most =
small to
moderate profits tend to vanish, the market teaches you to cash them =
in before
they get away. Since the market spends more time in consolidations th=
an in
trends, it teaches you to buy dips and sell rallies. Since the market=
 trades
through the same prices again and again and seems, if only you wait l=
ong
enough, to return to prices it has visited before, it teaches you to =
hold on to
bad trades. The market likes to lull you into the false security of h=
igh
success rate techniques, which often lose disastrously in the long ru=
n. The
general idea is that what works most of the time is nearly the opposi=
te of what
works in the long run.&#8221;<o:p></o:p></span></font></span></p>

<p class=3DMsoNormal><span class=3DEmailStyle15><font size=3D2 color=
=3Dnavy face=3DArial><span
style=3D'font-size:10.0pt;mso-bidi-font-size:12.0pt;font-family:Arial=
'><![if !supportEmptyParas]>&nbsp;<![endif]><o:p></o:p></span></font>=
</span></p>

<p class=3DMsoNormal><span class=3DEmailStyle15><font size=3D2 color=
=3Dnavy face=3DArial><span
style=3D'font-size:10.0pt;mso-bidi-font-size:12.0pt;font-family:Arial=
'>William
Eckhardt, interviewed in The New Market Wizards: Conversations With A=
merica's
Top Traders <span style=3D"mso-spacerun: yes">&nbsp;</span>Schwager (=
1994)<o:p></o:p></span></font></span></p>

<p class=3DMsoNormal><span class=3DEmailStyle15><font size=3D2 color=
=3Dnavy face=3DArial><span
style=3D'font-size:10.0pt;mso-bidi-font-size:12.0pt;font-family:Arial=
'><![if !supportEmptyParas]>&nbsp;<![endif]><o:p></o:p></span></font>=
</span></p>

<p class=3DMsoNormal><span class=3DEmailStyle15><font size=3D2 color=
=3Dnavy face=3DArial><span
style=3D'font-size:10.0pt;mso-bidi-font-size:12.0pt;font-family:Arial=
'>John<o:p></o:p></span></font></span></p>

<p class=3DMsoNormal style=3D'margin-left:.5in'><font size=3D2 color=
=3Dblack
face=3DTahoma><span style=3D'font-size:10.0pt;font-family:Tahoma;colo=
r:black'>-----Original
Message-----<br>
<b><span style=3D'font-weight:bold'>From:</span></b> owner-canslim@li=
sts.xmission.com
[mailto:owner-canslim@lists.xmission.com]<b><span style=3D'font-weigh=
t:bold'>On
Behalf Of </span></b>Katherine Malm<br>
<b><span style=3D'font-weight:bold'>Sent:</span></b> Sunday, December=
 16, 2001
5:27 AM<br>
<b><span style=3D'font-weight:bold'>To:</span></b> canslim@lists.xmis=
sion.com<br>
<b><span style=3D'font-weight:bold'>Subject:</span></b> [CANSLIM] Dev=
il's
Advocate: Why bother with fundamentals?</span></font></p>

<p class=3DMsoNormal style=3D'margin-left:.5in'><font size=3D3 face=
=3D"Times New Roman"><span
style=3D'font-size:12.0pt'><![if !supportEmptyParas]>&nbsp;<![endif]>=
<o:p></o:p></span></font></p>

<p class=3DMsoNormal style=3D'margin-left:.5in'><font size=3D2 color=
=3Dblack
face=3DArial><span style=3D'font-size:10.0pt;font-family:Arial;color:=
black'>Proposed:</span></font><font
size=3D2 color=3Dblack face=3DArial><span style=3D'font-size:10.0pt;f=
ont-family:Arial;
color:black;mso-color-alt:windowtext'><o:p></o:p></span></font></p>

<p class=3DMsoNormal style=3D'margin-left:.5in'><font size=3D2 color=
=3Dblack
face=3DArial><span style=3D'font-size:10.0pt;font-family:Arial;color:=
black'>If a
typical CANSLIM/Intermediate term move in a stock lasts only a few we=
eks, and
in good markets, only a few months, why bother selecting portfolio ca=
ndidates
using any sort of fundamental analysis? Returns in this time period a=
re
strictly based on price movement and can be maximized based on techni=
cal
indicators and price/volume action alone.</span></font><font size=
=3D2
color=3Dblack face=3DArial><span style=3D'font-size:10.0pt;font-famil=
y:Arial;
color:black;mso-color-alt:windowtext'><o:p></o:p></span></font></p>

<p class=3DMsoNormal style=3D'margin-left:.5in'><font size=3D2 color=
=3Dblack
face=3DArial><span style=3D'font-size:10.0pt;font-family:Arial;color:=
black'>&nbsp;</span></font><font
size=3D2 color=3Dblack face=3DArial><span style=3D'font-size:10.0pt;f=
ont-family:Arial;
color:black;mso-color-alt:windowtext'><o:p></o:p></span></font></p>

<p class=3DMsoNormal style=3D'margin-left:.5in'><font size=3D2 color=
=3Dblack
face=3DArial><span style=3D'font-size:10.0pt;font-family:Arial;color:=
black'>Thoughts
pro/con?</span></font><font size=3D2 color=3Dblack face=3DArial><span
style=3D'font-size:10.0pt;font-family:Arial;color:black;mso-color-alt=
:windowtext'><o:p></o:p></span></font></p>

<p class=3DMsoNormal style=3D'margin-left:.5in'><font size=3D2 color=
=3Dblack
face=3DArial><span style=3D'font-size:10.0pt;font-family:Arial;color:=
black'>&nbsp;</span></font><font
size=3D2 color=3Dblack face=3DArial><span style=3D'font-size:10.0pt;f=
ont-family:Arial;
color:black;mso-color-alt:windowtext'><o:p></o:p></span></font></p>

<p class=3DMsoNormal style=3D'margin-left:.5in'><font size=3D2 color=
=3Dblack
face=3DArial><span style=3D'font-size:10.0pt;font-family:Arial;color:=
black'>Katherine</span></font><font
size=3D2 color=3Dblack face=3DArial><span style=3D'font-size:10.0pt;f=
ont-family:Arial;
color:black;mso-color-alt:windowtext'><o:p></o:p></span></font></p>

<p class=3DMsoNormal style=3D'margin-left:.5in'><font size=3D3 color=
=3Dblack
face=3D"Times New Roman"><span style=3D'font-size:12.0pt;color:black'=
>&nbsp;</span></font><font
color=3Dblack><span style=3D'color:black;mso-color-alt:windowtext'><o=
:p></o:p></span></font></p>

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