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The Underlying Ideas Of Fundamental Ranking

Apr. 23, 2011 2:52 AM ET
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Diffusion's Blog
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Below are what I've said during the discussion with a value investor. It is about the underlying ideas of fundamental raking. This may help one to understand where it comes from.
I think although every individual should be objective when valuing a company, [...] the valuation is collectively subjective. It is collectively subjective because the market is a voting machine (in short term, of course). With this in mind, should a value investor always try to use the most popular ratio, i.e., P/E, when he [tries] to value a company? At least to start with?
[Using P/E is] not following the majority, [it is] taking advantage of it. [Value investor's] logic is fact = right = profit, and non-fact = wrong = loss. I'm OK with the first part, [the] part that fact = right and non-fact = wrong. But I just want to point out that more often than not, right <> profit and wrong <> loss.
The [fundamental ranking] system is not based on fact, it is based on behavior, i.e., it tries to chase what the market would think the most important and make profit in short period. So I think I couldn't afford to reveal the formulas, because behavior, not like fact, does evolve over time, and it does respond to [feedback].
[The idea of fundamental ranking is] from the opposite side [of value investors]. [It is designed for] a trader [...]. I spend time to study the structure and the behavior of the market. But then I learned that one couldn't make big profit by only knowing structure and behavior. The market has something else in its mind, and lately I start to realize it is "value". It may not be the true value in the mind of a successful value investor, but that would be OK. As long as the market chases it, it might be a good idea to chase it in short term. That's how I come up with this ranking system.
Revealing the formulas has at least three effects. [One is to invite verification.] The other two are: to invite followers, and to invite competitors. In some sense followers are competitors, but they have different functions. In the world of trading, followers help you to mark up the price, while competitors squeeze out your profit margin. I'd like to have followers but not competitors. So I think the best way to do is, for a specific company, [to reveal] only the formulas that is most important to value that company. Most brand name research firms are doing this. [...] But to reveal the whole package? It's too dangerous to me.
Here is a summary of fundamental ranking. For details please go to my blog at: http://trustamind.blogspot.com/

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