CHAPTER 2
Absolute Return and Methods of Price Analysis
Terms such as summer rally and year-end rally and sayings such as “After Labor Day down, you'd better leave town” still retain forecasting value. People believe in being able to make a long-term weather prognosis by observing what the weather is like on June 21. The Stock Trader's Almanac, published every year, is to the stock market community what the Old Farmer's Almanac is to meteorologists.
The stock market is a complex structure that can be judged properly only by untangling the details that ultimately influence price movements. Every year the financial industry sinks billions of dollars into market research in an effort to survive competition.
Many theorists believe that no private investor has a chance to survive in the brutal environment of the stock and commodity markets. They say that over an extended period, no fund manager or top analyst can choose better stocks than an amateur. More drastically expressed, if stocks were chosen by throwing darts at the financial page of the Wall Street Journal, the results would be as good as if a trained analyst had selected them.
The best evidence that this theory is incorrect are the endowment funds of Harvard and Yale. Both funds have an extremely good track record compared to most stock funds. In Chapter 6 of this book, we will look more closely at stock selection and respective performance profiles.
