i have the opposite pov. i think investing is more about broad macro knowledge (at least now) than it is about digging into the numbers. i mean, the numbers are already assembled and it doesn’t take much to quickly normalize earnings by removing the usual suspects. having knowledge of the past 200 years of financial history as well as knowledge of economics, psychology, etc is more important than being able to ensure a company is correctly calculating depreciation or dealing with their inventories properly. someone with an accounting designation could help you identify if a company is a fraud (but still unlikely) but it will likely hurt you when trying to forecast how a company will perform in the next 1-30 years. accountants are notorious for lacking an imagination.
I value historical knowledge, but I do think short term opportunities come from digging into the numbers and testing to see if anything about the current price seems off.
The macro situation is important, particularly on the risk side, but a lot of that ends up being baked in to prices. Trying to figure out what other big investors are thinking and comparing that to what the market is priced at is really tricky. Given that many of the players have all seen the same history and are fed the same lessons about it, it’s challenging to have a differentiated point of view on that stuff.
I do think that biases may come into play here, in the sense that people read history and their biases reflect their point of view (e.g. was QE a good thing or not; was the lack of QE during the great depression a good thing or not), so you can differentiate yourself from other investors that way, but 1) it’s often hard to see your own biases, and 2) often times large investors become the market itself, so that these people’s worldviews start to drive the market more than any other logic.
Someone called me up to ask for my resume for a macro quant job. I love that kind of work, but the more I learn, the less convinced I am that it’s possible to do it well. To what extent it can be done is probably on the side of effective risk control, but usually these people want hyper-aggressive position traders so they can say exciting-sounding things to potential investors.
@Bchad-Then we all know that all models are fake,some are just more useful than others
Models aren’t all fake. They’re all simplifications, which is not the same thing.
Some are plain wrong, and therefore not useful; others give us information that is useful, but incomplete. The trick is figuring out how to protect yourself from the times when the model might be disastrously incomplete.
@bchad-whats your educational background if you dont mind me asking ?
I generally have the same view of an accountant’s inability to see the future. After all, a “classically trained” accountant only recognizes what has happened and how to record it on the financial statements.
That said, I’m not so sure that the economist/financier’s ability to forecast is any better. EG - we all know that oil prices dropped from $110 to $45 from June to January. This past January, I was putting some of my old Christmas decorations away, and I happened to look at the newspaper I had wrapped them in last year.
January 2014 -
- “$100/bbl oil is here to stay forever”
- "Economist says “this time it’s different”.
- "Economist says “this time, it’s technology-driven, not price driven”
- “CEO’s predict Midland population to double in next five years due to population influx”
- “Oil companies plan to spend an additional 20% in their drilling budget”
- “Oil companies can’t find enough people to work”
- “Permian Basin added 15% to its rig count from this time last year”
- In general, the consensus was that the good times will continue for ever and ever, amen. (And I’m talking about PhD havin’ economists, CEO’s, CFO’s, government revenue economists, financial analysts, etc. Not just talking about the population in general.)
January 15
- “The sky is falling”
- “Oil could continue to tumble to $10/bbl” (Yes, this was a real headline in the local paper)
- “People leaving Midland in droves”
- “Prepare yourselves–the worst is yet to come.”
- “Capital budgets slashed by 40%”
- “Rigs are being stacked–it looks like an oil company graveyard”
- “Halliburton laying off 7,000, and Baker Hughes laying off 5,700”
So while I agree that accountants are not good at forecasting, I’m not so sure that the forecasters are any better.
@Greenmat-True,but they seem to earn people trust better and therfore get paid better
i guess my point is that you’re always looking for a diamond in the rough when you’re looking to hire a fortune teller. this diamond will almost never be an accountant and will likely always be someone with a broader education and more curious and open view on the world.
accountants would’ve looked at the oil numbers and said “there’s a supply/demand imbalance but since prices haven’t fallen, they probably won’t” whereas truly broad thinkers would’ve said “hmm, every commodity on the planet BUT oil is crashing, maybe oil will crash too?”. it wasn’t that hard to develop an underweight energy case in 2013-2014 based on what was happening in the broad commodity complex.
In my experience with auditors/financial reporters, it’s hard NOT to find someone with a more curious and open view of the world. Those people (as opposed to valuation analysts and some tax planners) are told what to think by FASB.
Is that why every single “broad thinker” (including the economists hired by the state, the banks who make loans to E&P companies, and the owners of the E&P companies) who’s supposed to predict petroleum prices) got it precisely wrong?
anyone whose job it is predict oil prices is the worst at predicting oil prices due to anchoring bias. also, if they want to keep their job as an oil price forecaster, when oil is at $100, the most bearish they can go is $85-$90. it’s mostly PMs and AM guys who make the good calls in this regard as they are the ones actually allocate capital and whose decisions actually matter. being a price forecaster is not a good position for the types that i’m describing. there’s a reason why commodity price forecasters aren’t paid the big bucks (generally) but those who make calls for $10B books are.
Isn’t Citi’s oil analyst predicting $10 oil ?
^Somebody did. It was all over the Midland paper.
I didn’t pay too much attention to it, because A.) I have serious doubts that it can really go that low, given the global demand for it, and B.) if it does, I’ll be out of a job and my house will be completely worthless, and I’ll probably have to declare bankruptcy.
There are lots of ways to skin a cat and many viable investing / trading strategies including being faster, a better business analyst, longer-term in the right stocks, catching the inflection in macro trends, etc. My view is that the surface numbers are a pure commodity and have been measured, cut, dissected, etc. in every possible way. It is hard to get an edge on the pure numbers unless you are a quant in which case you’re betting you are smarter and better able to process and measure the numbers and then execute on that. The quant game is extremely crowded now. It’s also prone to its own set of errors.
Generally, the people I know who consistently make money in the stock market are those who can anticipate what the numbers will be in the future within a reasonable range and with a reasonable degree of confidence. It’s hard to make a predictive algorithm for that. For me it’s been easier to do it on the short side because I can very rapidly find stocks of companies that have little or no chance of ever succeeding. The long side is harder because you have to predict what will happen and it’s much more open-ended, and generally takes longer. On the short side you are only handicapping what will not happen. I look for the Special Olympics kid lined up on the starting blocks in a race against real Olympic athletes. That is a very easy bet because you already know how it’s going to end 10/10 times. Example A: VPCO which dropped ~90% in about a year. Zero probability of success. Zero.
^ Blake’s mom?