Trend following and fundamentals

From: http://www.michaelcovel.com/2009/04/25/david-merkel-defending-a-wrong-view-to-the-bitter-end/#comment-4377

Fundamental investing presupposes that one knows more than the market, that essentially the market for that security is somehow wrong. It is the quintessential ego play, as one is therefore smarter than the market. This incidentally explains why so many “good investors” were blown up by the market: they take positions, the market moves against them, they buy more, their ego will not allow the possibility that they are wrong. This is why the market killed longs like Bill Miller and hedgies like Amaranth or Niederhoffer.

Trend following presupposes that one can never know more than the market, that the market, despite its apparent randomness, is always right. The real irony in trend following is that it is based on fundamental investing at the margin. Securities are priced at the margin by intense supply and demand of that specific security. BUT, it is the sum total of the supply and demand which moves the market, and as information is discovered by more and more investors, a trend is formed.

Therefore the dispute between the fundamentalists and the trend followers lies in the differential between what one believes he knows. The fundamentalists believes that he is smart enough to outthink the market, to somehow know more than the myriad of inputs into the complex system, and to then translate that into an investing decision. The trend follower believes that he could never be smarter than the sum total of “smart investors” pricing the security at the margin… as well as the continual marginal information being priced into the security during the day.

Guys like Merkel are just examples of egos who cannot accept that a concept like trend following can work, as it doesnt take minds like soros or robertson to make money. It is almost like they believe you need to be some avant thinker to make money in the markets. They need to justify their education, their backgrounds etc, in order to satisfy some justifiable performance equation in their mind. They cannot stand the fact that something as seemingly simple as trend following could better their fundamentally-based results. What they continue to misunderstand, and the key to the entire trend following method, is that trend following not only checks its ego at the door, it USES fundamental investing in tota, as its foundation. THAT, i think, is the great and unseen irony in trend following.