Fantastic note here by Michael Mauboussin of Credit Suisse. Mauboussin is the rare fundamental analyst who is both a good analyst and a good communicator. That is, he can break big complex matters down in such a way that they don’t just sound like a bunch of numbers thrown at a wall.
In his latest research piece he breaks down the key aspects of great fundamental investors. Of course, a fundamental analyst like myself loves this sort of stuff. While I am not a proper quant (whatever that is!) I do adhere to the idea that there are very fundamental reasons for the market’s movements. I am, at heart, a rigorous empiricist. Although the market’s movements can never be explained precisely (due mainly to behavioral irrationality) they can be explained approximately so as to help someone implement a probabilistic framework for investing success.
My rigorous empirical approach is a bit different than Mauboussin (who is more of a true stock picking value investor), but the same basic lessons apply to both a top down (macro approach like mine) and a bottom up micro approach (like Mauboussin’s). I prefer the top down approach because it helps me better digest how the economic and market machine works. And yes, it is very much like a machine. That is, there are institutional and contractual components to the financial world that dictate how certain things operate at a fundamental level. Much like a car has a structural framework which dictates what it can and cannot do, the economy and the financial markets adhere to a certain set of fundamental rules that dictate how certain things operate. Of course, the trouble is the human element. A car is designed to do certain things, however, when you put a person inside that car it can do very unpredictable things just like the markets and the economy. Understanding the structure of the markets and the economy is an approximate way of understanding these boundaries, limitations and potential directions.
Anyhow, go have a read and feel free to follow up with me in the forum if you have any questions. And once you have a read of the Mauboussin note go read my two papers on Understanding the Modern Monetary System and Understanding Modern Portfolio Construction. I think you’ll tie a lot of useful concepts together by doing so.