the fundamental analyst concludes that the market over- (under-) values the asset. A long (short) position in the market should be taken to profit from this supposedly under- (over-) valuation. The philosophy behind fundamental analysis is that in the end, when enough traders realize that the market is not correctly pricing the asset, the market mechanism of demand/supply, will force the price of the asset to converge to its fundamental value. It is assumed that fundamental analysts who have better access to information and who have a more sophisticated system in interpreting and weighing the influence of information on future earnings will earn more than analysts who have less access to information and have a less sophisticated system in interpreting and weighing information. It is emphasized that sound investment principles will produce sound investment results, eliminating the psychology of the investors. Warren Buffet notices in the preface of ``The Intelligent Investor'' (1973): ``What's needed is a sound intellectual framework for making decisions and the ability to keep emotions from corroding that framework. The sillier the market's behavior, the greater the opportunity for the business-like investor.''
However, it is questionable whether traders can perform a complete fundamental analysis in determining the true value of a financial asset. An important critique is that fundamental traders have to examine a lot of different economic variables and that they have to know the precise effects of all these variables on the future cash flows of the asset. Furthermore, it may happen that the price of an asset, for example due to overreaction by traders, persistently deviates from the fundamental value. In that case, short term fundamental trading cannot be profitable and therefore it is said that fundamental analysis should be used to make long-term predictions. Then a problem may be that a fundamental trader does not have enough wealth and/or enough patience to wait until convergence finally occurs. Furthermore, it could be that financial markets affect fundamentals, which they are supposed to reflect. In that case they do not merely discount the future, but they help to shape it and financial markets will never tend toward equilibrium. Thus it is clear that it is a most hazardous task to perform accurate fundamental analysis. Keynes (1936, p.157) already pointed out the difficulty as follows: ``Investment based on genuine long-term expectation is so difficult as to be scarcely practicable. He who attempts it must surely lead much more laborious days and run greater risks than he who tries to guess better than the crowd how the crowd will behave; and, given equal intelligence, he may make more disastrous mistakes.''
On the other hand it may be possible for a trader to make a fortune by free riding on the expectations of all other traders together. Through the market mechanism of demand and supply the expectations of those traders will eventually be reflected in the asset price in a more or less gradual way. If a trader is engaged in this line of thinking, he leaves