The Problem With Fundamental Data

A pointed rant from The Zikomo Letter on the value of fundamental data:

All fundamental data is wrong in some way. Some of it is incorrect, some of it is published by people with a vested interest, and some of it is lies. I am not angry about it, but I think we should face the sometimes harsh reality provided by the Red Pill.

Let us start with company-provided information. If the history of public corporations tells you anything, it is that anything a corporation tells you should be treated as a lie. Sometimes it is deliberately misleading, sometimes it obscures the truth, and sometimes it just lies to your face. If you do not believe me, then I point you to some of those who were caught: Enron and Lehman Bros stick in the mind, but the list is long.

Do not kid yourself that these are the rogues in an otherwise healthy bunch: every public corporation twists and tortures their information to meet their objectives. In a previous life I was a company auditor, and I can attest that there is plenty of scope for maneuver within the law.

Technicians have long looked at fundamental data with healthy suspicion.  To be clear, I am not saying that fundamental data is useless.  I am sure some are able to use it to their benefit.  However, the risk of the “garbage in garbage out” problem with fundamental data is high.  One of the great things about relative strength is that it largely avoids this problem by simply reacting to what is happening in the market as opposed to what we are being told is happening.  

HT: Abnormal Returns

One Response to The Problem With Fundamental Data

  1. steve says:

    Agree with your main sentiment (in bold) wholeheartedly. And, having worked for a company during (and after) the transition from a private to a listed company, and having been involved in the budget meetings, I know that companies (completely within the law) have “plenty of scope for maneuver”.

    So if anything, I too should be sceptical of fundamental data. Which I am, but I don’t really give it any thought. Why? Because ‘it’ still works. By ‘it’ I mean a quantitative value approach more than anything. In other words, I don’t have to worry too much about the accuracy of earnings etc, as using those figures still ‘work’ for the investor in ‘beating the market’…

    Not to mention (as you point out) that others are able to use it (not just in a quantitative way) to their benefit. But you’ve really got to be a student of it then, in my opinion…and that sure isn’t for me!