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Evidence-Based Investing: Technical and Fundamental

Last update on: Feb 13 2020

For most people, there are two types of investing: fundamental and technical. There are subsets within the two categories, but those are the two main categories. This article is an entertaining review of the development of the two categories and argues that they have become like religions with different hard-core followers. It argues for following the evidence of what works in the markets and what doesn’t.

Taking a step back, the mission for long-term active investors is to beat the market. Active investors should focus on the scientific method to address a basic question: What works? Warren Buffett obviously showed that value investing, irrespective of technical considerations, can work. But George Soros and Paul Tudor Jones also showed that technical analysis can work just as well. An ever growing body of academic research formalizes the evidence that fundamental strategies (e.g., value and quality) and technical strategies (e.g., momentum and trend-following) both seem to work. Many dogmatic investors, however, looking to confirm what they already believe, selectively adopt the research evidence that fits their investing religion. In contrast, an evidence-based investor will conclude that fundamental and technical analysis strategies can work because they are two sides of the same coin. They are cousins—because they share the common objective of exploiting the poor decisions of market participants influenced by biased decision-making. As Andrew Lo, an influential and forward-looking financial economist at MIT, correctly observes about the debate between fundamental and technical traders, “In the end we all have the same goal, which is to forecast uncertain market prices. We should be able to learn from each other.”

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