The First Principles of Perennial Profit in Investing

2025-11-15

This is an English translation of an article posted on Medium written on 2019.

Abstract

The pursuit of perennial profit is the shared, yet elusive, goal of investors worldwide. While the market arena is crowded with those who act on emotion or chance, a dedicated few endeavor to develop a systematic approach to this challenge. A plethora of theories describing various investment methods exists, and frameworks for validating such methods are occasionally employed by the so-called professionals.

However, a more fundamental inquiry remains conspicuously absent from the world’s discourse: What constitutes a valid framework for verification itself? How can any method be established, with certainty, as truly capable of delivering perennial profit? This leads us to the very nature of such profit and the universal principles that must govern it—an investigation of this kind has yet to be undertaken.

This treatise embarks on a rigorous deductive inquiry, reasoning from first principles and applying the foundational methods of scientific investigation. Through this process, we seek to determine not only the existence of a universal principle for perennial profit, but also to define its form, its scope, and its limitations.

Given the nature of this approach, its conclusions bear the weight of logical necessity. If such a principle is established, it will not be merely another strategy, but the necessary condition to which all genuinely successful methods must adhere. The implications of this inquiry, whatever its outcome, will be profound for the world of investing.

Table of Contents

I. Prolegomena: On First Terms

II. The Logical Architecture of Perennial Profit

III. The Methodology of Perennial Profit

IV. Perennial Profit and the Philosophy of Science

V. Investing as a Science

VI. Causality in Investing

VII. The Science of Value

VIII. Conclusion

I. Prolegomena: On First Terms

The subject of this treatise is of considerable gravity, and its exposition is of commensurate difficulty. While there is a deluge of literature purporting to address similar themes, the vast majority amounts to little more than semantic trickery in their titles. To distinguish this work at the outset, I offer a promise: though the journey will require the meticulous clarification of many concepts, by its conclusion, the discerning reader will be compelled to agree—or at least find themselves unable to form a rational rebuttal—that this text does indeed articulate the universal principle of perennial profit in investing, devoid of wordplay or artifice. Moreover, this same reader will concede that its conclusions are eminently practical, holding profound significance for any serious investor.

Before proceeding, we must define what is meant by a “universal principle.” It refers to a law that governs all investment activities, without exception. It is not merely a viable principle among many, but the governing principle to which all other viable principles must conform. This alone explains the difficulty of our task and why works that competently address it are as rare as morning stars. Yet I reiterate my promise: the reader who follows this chain of reasoning to its end will be forced to acknowledge that what is unveiled is, indeed, the universal principle.

The establishment of such a principle is not a mere academic exercise. For once it is established, the very means of achieving perennial profit can be deduced from it directly.

This principle, for all its logical austerity and simplicity, remains unseen by the vast majority of market participants. This observation alone may suffice to explain why genuine profit is the province of the few.

Let us first define our central term: “perennial profit.” The concept is not complex, yet it must be precise. It signifies more than a single instance of winning; it is the act of winning continuously. This necessitates a series of investment activities that, when viewed in aggregate, are profitable. Crucially, this trend of profitability must be reasonably sustainable, which is to say, it cannot be the product of mere fortune. The deeper logical implications of this will be analyzed in the next chapter.

Finally, we must clarify the term “investing.” In its broadest sense, it is any deployment of capital with the expectation of a return. A narrower definition, often set in opposition to “speculation,” requires some form of diligent analysis prior to the deployment of capital. The fascinating truth, and a testament to the robustness of our inquiry, is that it does not matter which definition one adopts at the outset.

For this treatise will demonstrate that any activity capable of generating perennial profit must, by necessity, be a form of investing in the narrow sense. Indeed, we shall go further. The domain of perennial profit is narrower still: all perennial profit is the fruit of rigorous analysis, yet not all rigorous analysis bears such fruit.

II. The Logical Architecture of Perennial Profit

To dissect the universal principle of perennial profit, we must first construct a precise logical architecture for the concept itself. As stated, perennial profit implies a continuous series of gains, presupposing a sequence of investment activities that can be verified as profitable in aggregate over a historical period. This, however, is an insufficient condition. A mere track record of past profitability does not fulfill the definition. When someone claims to be a “perennially profitable investor,” the rational listener understands this to be more than a statement about the past; it is an assertion about the future. This treatise, engaging in no semantic games, accepts this common-sense understanding: perennial profit must encompass a demonstrable and sustainable trend of profitability that extends into the foreseeable future.

Therefore, perennial profit logically entails two distinct components:

  1. A verifiable record of aggregate profit from a series of past investment activities.
  2. A demonstrable basis for concluding that a similar series of future activities will exhibit a reasonably sustainable trend of profitability.

The stipulation of “similar” activities is crucial. If there is no logical continuity between the activities of the past (1) and those of the future (2), the temporal chain of “perennial profit” is broken. The very concept implies a consistent underlying logic that bridges yesterday and tomorrow.

Our next inquiry is to identify the subject of this perennial profit. Who, or what, is the agent of this success? This question is paramount, for without knowing what it is that truly profits, we cannot fully grasp the nature of the outcome.

The subject could be an institution, an individual, or a method. An institution, however, relies on individuals or methods for its execution. Thus, the ultimate subject is reducible to a collection of individuals and methods, or perhaps a single one of each. And if it is a collection, at least one of its constituent individuals or methods must be the source of the perennial profit for the whole to succeed. Our analysis can therefore be narrowed to the individual and the method.

Consider an individual who achieves perennial profit. Two possibilities exist:

  1. The individual employs a method, or a collection of methods, to achieve this result. If a collection, then at least one of its constituent methods must be the effective source of profit.
  2. The individual employs no method at all.

Setting aside cases of false claims, how are we to interpret the second scenario? Does it imply a flash of insight, an oracle whispering a stock ticker, followed by a transaction that invariably yields a gain—a pattern that repeats itself without fail?

If this were the case, then regrettably, by our own rigorous definition, this individual has not achieved perennial profit. We can only observe that they have fulfilled the first condition: a verifiable record of past profit. We have utterly failed to establish the second: a demonstrable basis for concluding that this success is sustainable. To borrow from Bertrand Russell’s classic illustration, this individual is like the inductivist turkey, observing the sun rise every morning and concluding it will rise again tomorrow, blissfully unaware of the impending Thanksgiving Day. For the person who uses “no method,” we lack any logical framework to project their past performance into the future.

Therefore, it is logically impossible for an individual to achieve perennial profit without a method. It follows that whether the nominal agent of success is an institution or an individual, the true, operational subject of perennial profit can only be a method. If it appears to be a collection of methods, it is because at least one among them is the active ingredient. Just as a medicine may contain only one effective compound, or two compounds that must work in synergy (which simply defines the “method” as their combination), so too is the engine of profit a singular, coherent process.

III. The Methodology of Perennial Profit

Our analysis has led us to a critical conclusion: the operational subject of perennial profit is a method. This method must satisfy two conditions:

  1. It must be verifiable as having generated aggregate profit over a series of past investment activities.
  2. It must possess a demonstrable basis for the reasonable expectation of a sustainable trend of profitability in a similar series of future activities.

Perennial profit can be viewed as an achieved outcome or as a yet-unrealized goal. For an individual who has not yet achieved this state but aspires to it, they must find a way to satisfy these two conditions in the future. How, then, can one generate a future series of investment activities that, when retrospectively examined, will prove to have been profitable?

Here we arrive at a fascinating turn. The question, as phrased, assumes the subject is a person. But we have already deduced that the true subject is a method. And while a person cannot travel back in time to generate a profitable history, a method can. We need only hypothetically deploy the method at a point in the past and simulate its prescribed actions up to the present day, observing whether the resulting series of activities would have yielded an aggregate profit.

The reader may scoff: “This is merely backtesting!” Indeed, any moderately sophisticated investor would be familiar with the term. But let us not be hasty. What we have done is establish, through pure logical deduction, that backtesting is a necessary condition for any claim to perennial profit. This is a non-trivial insight. I have yet to encounter a treatise that proves this necessity from first principles. Those who conduct backtests may now understand, on a foundational level, their inherent superiority over the vast majority who do not. This conclusion should be a cause for intellectual invigoration, not dismissal.

Yet, we have only satisfied the first condition. A method may pass a backtest with flying colors, but this is a statement about the past. How does one “demonstrate a basis for a sustainable trend of profitability” in the future? The common refrain, “past performance is no guarantee of future results,” serves as a potent rebuttal to even the most impressive historical track record. No one can predict the future with a degree of certainty that compels universal assent from all rational minds.

This is precisely where the profound significance of our inquiry lies, yet the logical structure of the problem is remarkably simple. Let us first understand why a method validated by a backtest may fail in the future. An exhaustive list of technical reasons would include:

  1. Insufficient Sample Size: The statistical scope of the backtest is too narrow, casting doubt on its historical validity in the first place.
  2. Overfitting: The method has been curve-fitted to the historical data, meaning the “signals” it identifies are predominantly noise, and the positive result is a mere coincidence.

These technical terms mask a simple logical principle. Consider a novice who, without any analysis, makes three consecutive profitable trades. We rightly dismiss this as insignificant. Why?

  1. The number of instances is too small to reveal the true nature of their “intuitive” process.
  2. The outcome could easily be a statistical artifact. Assuming a 50/50 chance of profit or loss, the probability of three consecutive wins is 1 in 8—hardly miraculous.

Those familiar with the mathematics of backtesting will understand that overfitting produces results with a far higher probability of being coincidental than natural chance. It is akin to finding, on a planet of a trillion blindfolded dart-throwers, one who has hit the bullseye one hundred times in a row, and then holding this individual up as proof of the superiority of blind intuition.

Furthermore, the more variables a method incorporates, the higher the risk of overfitting. Imagine an immortal, clueless investor. Over a trillion trades, their performance is dismal. But upon granular analysis of an infinite number of variables, a pattern is “discovered”: if they clip their toenails at dawn, wash their hair, perform a dozen other specific actions in sequence, and then eat a shrimp with wasabi before trading, a curated sample of one hundred such instances shows an aggregate profit. To then propose this ritual as a magical formula for success is absurd. Yet, the methods of many “professional” investors today are not substantively different; they merely substitute a sequence of arbitrary actions with a sequence of arbitrary mathematical indicators from a price chart.

We can now conclude, in more technical language, that the validation of past performance must be based on a statistically significant sample size and must scrupulously avoid the phenomenon of overfitting. The underlying logic, in a word, is the avoidance of coincidence. A coincidence, by its very nature, is a past phenomenon that cannot be replicated in the future. It fails our second condition. Rolling a die five times and getting a six each time may be a coincidence. Rolling it ten million times and getting a six each time is evidence of a loaded die. Searching for a method that would have produced the desired result of all sixes is to manufacture coincidence, and it is just as useless for predicting the future.

IV. Perennial Profit and the Philosophy of Science

It follows logically that if we can eliminate all elements of coincidence—if we can establish that past success was not accidental but the result of a necessary relationship—then we will have satisfied the second condition for perennial profit. The problem, however, is that a backtest, by its very design, can only report what would have happened had a method been executed from a certain point in the past. It cannot, in itself, tell us whether the result is a coincidence. While statistical techniques exist to estimate the probability of overfitting, a low probability of coincidence is not the same as the certainty of its absence.

Many investors, even “professionals,” may find a sufficiently low probability of coincidence to be adequate. Let us, for the sake of argument, assume their calculations are even accurate. The fundamental issue remains: the definition of “sufficiently low” is entirely subjective. There is no objective mathematical threshold for this term. The title of this treatise is “The First Principles of Perennial Profit,” not “The Principles of a High-Probability Profit.” This distinction is not pedantic; it is the chasm that separates the relative from the absolute.

The reader may object: “But what is truly absolute?” To pursue this question to its root would lead us deep into the philosophy of science, a diversion this practical treatise cannot afford. A simple analogy will suffice. In a meaningful sense, we all accept the fall of an apple from a tree to the earth as an absolute certainty. To argue otherwise is to challenge the very foundations of science, a task far beyond our current scope.

When we explain the “absoluteness” of the falling apple, we invoke the concept of gravity. The acceptance of “an apple falls to the ground” as a scientific truth rests on a logical architecture that is strikingly parallel to the one we have constructed for perennial profit:

  1. Past events have verified the seemingly absolute nature of apples falling to the ground.
  2. Future instances of apples falling can be shown to possess a basis for their reasonably repeatable trend.

This parallel is revelatory. It demonstrates that for “(A specific method) achieves perennial profit” to be elevated to the status of a scientific truth, it must be supported by the same kind of reasoning that supports the truth of a falling apple. Upon grasping this, the discerning reader may be struck by the sudden realization of just how much of the investment world is saturated with pseudoscience. While this is a critical insight, it is ancillary to our main task of establishing the universal principle itself.

V. Investing as a Science

I am not a physicist, and I have no intention of reinventing the wheel by expounding on the complete scientific reasoning that established the falling apple as truth. For our purpose, a single, decisive point will suffice: our acceptance of the falling apple as a truth is predicated on our profound understanding of the causal relationship that underlies it. We perceive a web of cause and effect in the world, and through it, we comprehend the existence of a force like gravity, which explains not only the falling apple but a multitude of other phenomena.

It has now become clear. To establish “(A specific method) achieves perennial profit” as a scientific truth, we must establish a causal relationship.

The law of universal gravitation explains both why the apple falls to the earth and why an object in deep space does not. Given that all scientific truths share a common logical architecture, there must exist a principle that explains why some investment methods achieve perennial profit and others do not. In the domain of investing, the closest analogue to the universal force of gravity is the “invisible hand” of supply and demand.

Regrettably, the market order dictated by this invisible hand lacks the clarity and calculability of the physical order governed by gravity. We cannot observe and measure its effects with the same precision. For instance, while we might calculate a statistical correlation between interest rate changes and market movements, we cannot conclude that this correlation reflects a causal link without a robust, explanatory causal framework. On this very point, there are likely as many interpretations of the causal framework as there are economists.

However, we need not delve into the limitations of economics as a science. Our subject is perennial profit, and our protagonist is the investment method. This is not a theoretical inquiry; it is a practical one. Perhaps it is best to treat this as a distinct, albeit related, field of study.

The crucial takeaway from our discussion so far is this: the logical structure required to satisfy the second condition of perennial profit is that of causality. In other words, we must demonstrate a causal link between the method and the profit, not merely the correlation suggested by a backtest.

The ultimate aim of investing is profit, and the ultimate state of profit is its perennial nature. Therefore, this deduction—that causality is the bedrock of any sound investment method—lays the very foundation for treating investing as a science. The discerning reader will surely grasp the profound significance of this step.

VI. Causality in Investing

Through a dense but momentous intellectual journey, peeling back layers of abstraction like an onion, we now approach the core: How can we establish a causal relationship between a method and its profit, thereby validating its claim to perennial success?

The astute reader, having followed the trail of deductions, may feel a surge of anticipation. The universal principle is within reach. But here, our relentless logic leads us to an impasse, a seeming aporia: almost all conventional investment methods are incapable of establishing such a relationship.

The reason is as simple as it is devastating. Whether a method is based on mathematical signals derived from price movements or on data extracted from financial statements, it is, in its essence, built upon correlation. So long as a causal link is not established a priori, the method remains a correlational exercise. And since correlation can never, by itself, prove causation, such methods are fundamentally severed from the causal nexus we seek.

This is a startling conclusion. It means that the vast majority of methods we hear about and see practiced—most notably, the entire and immensely popular school of Price Analysis (what is colloquially known as “technical analysis”)—are, by their very nature, constitutionally incapable of producing perennial profit.

Yet, just as we reach this dead end, a new path reveals itself. The reader of the highest logical acuity will have already taken the next step with me: if methods built on correlation are doomed to fail, then we must build our method on causation itself.

Here lies a conclusion of beautiful and subtle elegance. While we determined that the subject of perennial profit is a “method,” we now see that a genuinely perennial method can only be constructed from the universal principle itself.

To reach our final destination, we must now endeavor to build a method upon a causal foundation that satisfies our conditions. This is the path, forged through rigorous deduction, that will lead us to the universal principle.

Where do we begin? Let us re-examine the structure of “method” and “profit.” A method generates a series of investments. Profit is the aggregate result of these activities, but it originates from discrete instances of gain, each of which arises from an appreciation in the value of the invested asset. Therefore, the success of a method is ultimately rooted in the price appreciation of its chosen assets. (Let us not engage in semantic games; a short-seller is simply using one asset, like a stock, to purchase another—cash. Price is always relative.) Even if a method targets multiple assets, the profit must originate from at least one of them, allowing us to simplify our model, without loss of generality, to a method targeting a single asset.

This somewhat elaborate deconstruction serves to clarify a singular point: the relationship between a method and profit is the relationship between the method and the price appreciation of its chosen asset. To establish a causal link between method and profit is to establish a causal link between the method and that price appreciation.

This brings us to the final frontier of our inquiry. Since our method must be built from the universal principle, and we need to establish a causal link between this yet-unspecified method and asset price growth, our task becomes one of identification. We must find that which has a causal relationship with the asset’s price growth, and build our method upon it.

The method thus constructed will, by definition, be causally linked to price appreciation, and therefore, to profit.

After this long intellectual campaign, the core question is distilled to its purest form:

What is it that has a causal relationship with the price of an investment asset?

VII. The Science of Value

The answer to our core question has, in a sense, been known to us all along. Economics has already provided the answer: the price of anything is determined by supply and demand. To reject this is to reject the entire edifice of economic science. It seems we have our causal agent. Can we now construct our method?

The difficulty is that knowing the answer is “supply and demand” does not immediately tell us how to build an investment method. Why is this so?

Let us revisit the operational structure of a method. A method capable of generating a series of investment activities, and therefore of being backtested, must consist of a sequence of buy and sell actions. In its simplest form, this is a repeating cycle of Buy-Sell, Buy-Sell. Such a method therefore requires a complete description of the conditions for buying and selling, and these conditions must be based on quantifiable indicators.

In theory, supply and demand are quantifiable; one can even draw supply and demand curves. But a robust method cannot be built upon the abstract mathematics of a textbook theory. It requires real-world, observable data. Fortunately, such data exists. For any significant resource, while we may not have the full supply curve, we have data on annual production. While we may not have the full demand curve, we have data on annual consumption.

At this point, a sharp reader may raise a powerful objection: Does the current price not already reflect all available information about supply and demand? Is the prevailing market price not the very equilibrium point of these forces? If everything is already in the price, how can an analysis of supply and demand yield any profit?

This assumption—that the price reflects everything—is the foundational axiom of the Price Analysis school. The imaginative reader may also have deduced that the supply and demand data mentioned above is the traditional domain of what is called “fundamental analysis.” This ambiguous term, like “technical analysis,” is a poor translation and is better rectified as Value Analysis. (Indeed, the English terms themselves ought to be corrected to “Value Analysis” and “Price Analysis.”) We can now see with greater clarity that this dichotomy is a universal feature of the investment world, not confined merely to stocks. The most perceptive readers may now experience a moment of epiphany: the search for a universal principle of perennial profit, through layers of logical deduction, has led us directly to the heart of the age-old debate between these two rival schools of thought. A tale more dramatic than fiction, perhaps?

The axiom of the Price Analysis school is correct, as far as it goes. For any liquid asset, the current price reflects the current state of supply and demand. A core tenet of traditional Value Analysis, however, is that “price does not reflect intrinsic value.” Unfortunately, in the world of science, a vague claim of “intrinsic value” is untenable. It is an imaginary construct—unmeasurable and therefore unfalsifiable, much like positing a demon inside a wristwatch.

However, within our new framework, where a method must be built upon the causal driver of supply and demand, we can reformulate the claim of Value Analysis into a scientifically rigorous statement: Price reflects the current state of supply and demand, but this state may deviate from the state that ought to exist according to the underlying causal network. The price that would prevail in this “ought to exist” state is the asset’s true Value.

What does “ought to exist” mean? It is analogous to saying an apple ought to fall to the ground; if, due to some unusual circumstance, it flies upwards, the force of gravity acting upon it has not changed. The only correct interpretation is that “ought to exist” must be understood within a causal context. It is the outcome that should result from the web of causal forces acting upon a thing.

Supply and demand are themselves outcomes of a deeper causal network. Only by understanding this network can we determine what the state of supply and demand ought to be, and whether the current state deviates from it.

This means our task is to identify the factors that determine the supply and demand for an investment asset. We have already established that price reflects supply and demand, and that our method must use quantifiable data. Therefore, our mission is to find the quantifiable data factors that are causally linked to supply and demand, and which thereby determine the asset’s price.

What factors fit this description? The specific factors may vary for different assets, and we do not yet know them. But we know what they must be like. They must be tangible, real-world data with a plausible potential to influence supply or demand—not abstract lines drawn by mathematical formulas on a price chart. Since price is the ultimate quantification of supply and demand, our logic is now complete. We can now exhaustively list all potential causal factors, examine whether any single one of them has a unilateral and determining relationship with price, and if so, establish causality.

In the world of equities, for instance, the universe of potential causal factors for supply and demand includes a company’s earnings, net assets, sales revenue, and dividend payouts. We do not know, a priori, which of these factors, if any, actually determines the stock price. Nor do we know if the true determinant is a single factor or a composite of several. But we now know this with certainty: the true causal determinant must be found within this domain of tangible, supply-and-demand-related data. Any factor that lacks a plausible connection to supply and demand need not be given a moment’s consideration. This insight alone radically narrows our field of inquiry.

The concept of a “unilateral and determining” relationship with price requires precise definition. It does not imply that no other factors have any effect whatsoever. Rather, it means that when we isolate this single factor and observe it in relation to price, the relationship is so strong that the factor, by itself, is sufficient to explain the price’s movement. Its changes determine the changes in price. The discovery of such a sole unilateral determinant from the pool of all plausible factors would be sufficient to establish a causal link for the purpose of our thesis.

Why is this unilateral nature so critical? Because for any other factor that lacks this power, while we cannot rule out some distant causal connection, we have no reliable means of isolating its specific impact from the noise of all other influencing variables. We therefore cannot establish its causality with the required degree of certainty. Is the existence of such a singular determinant guaranteed for any given asset? No. It is entirely possible that for certain assets, no such factor can be found. In such cases, our conclusion is simple: a method for achieving perennial profit for that specific asset cannot be constructed. However, if we can discover such a factor for any asset, we can build a perennial method upon it.

What if our investigation reveals multiple factors, each appearing to have a unilateral and determining relationship with price? For example, factor A appears to determine price when viewed in isolation, but so does factor B. Such a scenario would strongly suggest that factors A and B are themselves highly correlated, perhaps even causally linked. One possibility is that A determines both B and the price, making B a mere secondary effect. Another is that A (along with other minor variables) determines B, and B in turn determines the price, making A a remote cause.

This presents a more complex analytical challenge. We would need to employ sophisticated mathematical techniques to measure whether A, B, or a specific combination of A and B is the true determinant. Even then, such methods can only reveal the strength of a correlation. The conclusion would remain probabilistic, not absolute.

Does this complexity mean our search for causality is ultimately futile? Not necessarily. In such a case, we would have successfully established that at least one of the three hypotheses (A determines price; B determines price; a composite of A and B determines price) must be true. This gives us three distinct causal hypotheses. If we construct three separate investment methods based on each of these hypotheses, and find that they all lead to an identical set of investment conclusions—or if we can identify a “greatest common divisor” method that is the logical outcome of all three—we will have succeeded in building a method for perennial profit.

Let us pause and consider: could this entire chain of reasoning be flawed? Yes. An exhaustive list of conditions for its failure would be:

  1. The foundational axioms of economics are wrong.
  2. Our exhaustive list of potential supply-and-demand factors is incomplete. The true determinant of price lies outside our current knowledge.

If the first condition is true, our entire understanding of the economic world must be reconsidered. If the second is true, it means we are unable to establish a causal link and thus cannot construct a perennial method. Of course, the notion that a primary determinant of asset prices exists today, unknown to us like some form of economic “dark matter,” would be astonishing. In our age of information, it is highly improbable that such a factor could be known to a select few and completely hidden from the rest. Therefore, the logical conclusion is either that no one on Earth can build a perennial investment method, or that the readers of this treatise now know that it is, in fact, possible.

VIII. Conclusion

Though this treatise has been lengthy, it has fulfilled the promise made at its inception. The discerning reader will be compelled to agree—or at least find themselves unable to form a rational rebuttal—that this work has indeed articulated the universal principle of perennial profit in investing, devoid of wordplay or artifice. Furthermore, they will concede that its conclusions are eminently practical, holding profound significance for any serious investor.

Let us now consolidate the conclusions of the preceding argument:

  1. The concept of perennial profit entails not only a verifiable history of aggregate gains but also a demonstrable basis for their future sustainability. (Ref. The Logical Architecture of Perennial Profit)

  2. The true subject of perennial profit is never a person or an institution, but always a method. (Ibid.)

  3. The historical verification component of a method can be addressed through backtesting. (Ref. The Methodology of Perennial Profit)

  4. A backtest, regardless of its outcome, is inherently incapable of providing the demonstrable basis for future sustainability. (Ibid.)

  5. To bridge the past and the future, a causal relationship must be established between the method and the profit. (Ref. Investing as a Science)

  6. Price Analysis (i.e., technical analysis), being rooted in correlation rather than causation, is constitutionally incapable of producing a perennial method. (Ref. Causality in Investing)

  7. A perennial method can only be constructed by first identifying that which has a causal relationship with price, and then building the method upon that causal agent. (Ibid.)

  8. Since price reflects supply and demand, the causal agent can be identified by finding the sole, unilateral determinant of price from among the pool of quantifiable factors that plausibly affect supply and demand. (Ref. The Science of Value)

It is evident that this inquiry into the universal principle of perennial profit has necessarily ventured into questions far beyond what most readers might have anticipated. The full scope of its implications was difficult to foresee at the outset.

Following this chain of deduction, the path is clear. For any given investment asset, if we can establish a single factor—let us call it the Price Determinant—that has a causal relationship with its price, we can construct a method for perennial profit for that asset. If a single Price Determinant cannot be isolated, but the possibilities can be narrowed to a few candidates, one may still succeed by constructing a method based on the “greatest common divisor”—the logical conclusions shared by all the candidate hypotheses. Conversely, if we cannot identify the Price Determinant for a particular asset, then it is impossible to construct a method for perennial profit for that asset.

This is the universal principle of perennial profit in investing. It is the only one.

How one might construct such a method from a Price Determinant is a subject for another treatise.