# Why read charts if you're a fundamental/value investor?



## mogley (13 November 2007)

Ok so i've just started to get my head stuck into some literature and am currently in the process of reading Intelligent Investor by Graham. I haven't read much but I understand it is a book about value investing and basically picking stocks that are fundamentally sound, incorporating a margin for error in calculations and aiming to minimise losses VS maximise profits. This insight particularly from Graham is probabaly worth a detailed read. 

The book also makes a distinction between investors and speculators or traders.
I'd like to try and adopt his approach and invest in shares as if it is ownership in a fundamentally sound company but at the same time allocate some of my capital to speculating and trading.

To me they are two totally different goals and methodolodies. Both involve making money but they are only alike as much as a 100m sprint is alike a marathon. Same goal but different race, different preparation, different mentality.

In my opinion anyway.

So if this is the 'right' way to approach things as Graham seems to suggest, how come so many people combine fundamental and technical analysis into their decision making?

I don't quite understand how a long-term approach (fundamental) can then be subject to a short-term analysis (charting, technicaly analysis trading). Aren't they different objectives?

For example, say you pick XYZ because it is fundamentally sound and has good prospects and is currently a value stock (undervalued by the market), and then you apply technical analysis and conclude that the short-term prospects are not good.
As an investor with a long-term view, isn't the short-term irrelevant? Hence, technical analysis is quite useless for a strict Graham-esque value investor?

I would like to trade and speculate a little so I will eventually get stuck into some charting literature but purely from a theory point of view, I can't quite grasp why some people seem to combine the two approaches.

Am i wrong?


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## prawn_86 (13 November 2007)

*Re: Why read charts if your a fundamental/value investor?*

People who invest mid term can combine the approaches effectively. As if you are investing in say a 3 - 6 month timeframe then a few cents difference can make a bit of a difference to the overall profit. So use charts to try and pick an entry point

Also, even if a stock is fundamentally undervalued, many would say there is no point investing in it until an up-trend has started again. Your money would be better off elsewhere, even earning interest in the bank than in a down trending stock.

Comes back to opportunity cost really.


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## stoxclimber (13 November 2007)

*Re: Why read charts if your a fundamental/value investor?*

Most people work on the basis that the more analysis you do, the better your decision will be. However, for most people their technical analysis is not good enough to make a significant difference in their share purchasing and selling. (OTOH, fundamental analysis may not be good enough either). But I would characterise technical analysis as greatly overrated by the average punter; in the sense that it's a lot harder to use than people think. 

There are plenty of investors and traders in the world who do not use technical analysis.


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## CanOz (13 November 2007)

*Re: Why read charts if your a fundamental/value investor?*



mogley said:


> Ok so i've just started to get my head stuck into some literature and am currently in the process of reading Intelligent Investor by Graham. I haven't read much but I understand it is a book about value investing and basically picking stocks that are fundamentally sound, incorporating a margin for error in calculations and aiming to minimise losses VS maximise profits. This insight particularly from Graham is probabaly worth a detailed read.
> 
> The book also makes a distinction between investors and speculators or traders.
> I'd like to try and adopt his approach and invest in shares as if it is ownership in a fundamentally sound company but at the same time allocate some of my capital to speculating and trading.
> ...




I was amazed when i read New Market Wizards by J.Schwager just how many sucessful fund manager's used both in thier decision making. They use news too, but not the way you think, they sell on good news and buy on bad.

You can still be a good fundy investor and use a TA approach to trade the swings in the market rather than ride out a trend full of dips that give back open profit. Brokerage is so cheap now that it does not come into play really as much.

Gotta run.

Cheers,


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## ithatheekret (13 November 2007)

*Re: Why read charts if your a fundamental/value investor?*

Fundamentals are the equivalent of a captain knowing his ship , technicals are like the radar , which helps him steer a safe course through the reefs .


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## motorway (13 November 2007)

*Re: Why read charts if your a fundamental/value investor?*

Graham's anecdote of Mr market...

If he was a real human patient... The Doctor would keep a medical history and charts ( even if just in tabular form ) of his pathology, blood sugar, pressure
pulse , hormone levels.. So as to monitor him and adjust medecins...

We as investors keep charts in order to better profit form his mood swings
But also in his more lucid moments his knowledge

It is the price You pay that determines Your future returns

Value ,growth and technical investors would all agree..
And price You pay is determined by WHEN you pay

Or as Buffet says when you choose to swing the bat..

What you buy is the other half of the method
technical and fundamental methods can apply here as well..

motorway


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## battiwallah (13 November 2007)

Has anyone read "The Intelligent Australian Investor" by John Leithner?  I am curious to know what method he uses to obtain the intrinsic value of a stock.  Any comments?


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## motorway (13 November 2007)

http://www.leithner.com.au/

Worth While reading his book..

For his  overview on markets and their uses
And on markets as a basis for freedom ( draws on Austrian  School of economics ) also the wrong uses of markets ( phantom gains ).
what is risk etc

His example of TLS is a DCF type analysis...

he has no truck with TA or speculative trading
But he defines this narrowly as buying high and selling low
( chasing popularity and glamor )

I do have a copy somewhere.. But it is a while since I read it

motorway






> When research is able to estimate a business’s intrinsic value (it often cannot do so); when there is hard evidence that the business in question possesses solid long-term investment value (there often isn’t); and when there exists a ‘margin of safety’ (i.e., the business’s securities are selling at a price which is significantly less than a conservative estimate of their intrinsic value), Graham-style value investors ask themselves a hypothetical question. “If financial markets were to close for the next five years, would I still be happy to own this business’s securities?“ Only if the answer is “yes” and there exists no other opportunity that is more compelling do they act–decisively.






> The securities of good, well-managed businesses are not often available at attractive prices. It thus makes sense to research diligently and wait patiently until such opportunities present themselves; and when they do, to place significant sums in those businesses.






> The purpose of Leithner & Co. is to invest its assets in bonds, other businesses and cash deposits (“securities”) for its shareholders’ benefit.The Company adheres strictly to a businesslike, long-term, “value” approach to investing (see Investment Philosophy for a detailed description of this approach and a discussion of its comparative rarity in Australia). Leithner & Co. is a value investor in the manner practised by Benjamin Graham (widely recognised as the founder of modern securities analysis) and his colleagues Warren Buffett, Thomas Knapp and Walter Schloss.Graham-style value investors have several identifying characteristics:
> 
> they invest in particular businesses on the basis of their underlying value (which is assessed on the basis of operating history, present circumstances and cautious projection of future potential). They never invest on the basis of popularity with other investors, business commentators or other “experts”;
> 
> ...


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## nioka (13 November 2007)

Reading charts are an important part of understanding the fundamentals. I regularly compare the charts with company announcements and periodic reports, the effect on price associated with directors or major holders buying or selling, the volume being traded etc. I make my decision based on the fundamentals but I always take the charts into consideration.
 ( I'm often wrong but get it right enough times.)


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## dhukka (13 November 2007)

For what it's worth I use fundamental analysis only, charts are irrelevant to my understanding of the fundamentals.


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## pickles (18 November 2007)

I have tried using technical analysis and have found that it didn't work very well for me.  I have found that the best indicators are what is going on in the world of finance, especially America!! You really do have to keep up  to date with all the financial news in order to pick a market. As far as choosing companies with good PE's and valuations. some of the analysts are fairly good, but they can make mistakes too.  I also find where there is a rumour of a takeover it usually pays to take a small number of shares in the company that is going to be taken over. That can be very fruitful in the short term. The bottom line is you are the best one to make a decision based on your own research.  If you are new to all of this, it will take you about two years to really get a grip on it.  Good luck.
Pickles


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## Garpal Gumnut (18 November 2007)

nioka said:


> Reading charts are an important part of understanding the fundamentals. I regularly compare the charts with company announcements and periodic reports, the effect on price associated with directors or major holders buying or selling, the volume being traded etc. I make my decision based on the fundamentals but I always take the charts into consideration.
> ( I'm often wrong but get it right enough times.)




Agree Nioka, with a slight twist.

I use asx announcements and the AFReview as screening tools to keep about 60-80 stocks on a watchlist. Similar to you I look for changes in holdings and director's interest. Then I look at the charts of those companies particularly looking for breakouts from trading ranges. It was much easier 2 or 3 years ago when stocks traded sideways for a while. Today they are on the up and up so now I'm looking at trading ranges for signs of weakness. Volume I agree is important as is range. See some of tech/a 's excellent posts on this.

High, low, close, range, volume and daily, weekly, monthly, sector and xao and djia and ftse is as much as I concentrate on now. I find rsi useful but never changes my mind.

So I use funnymentals as a screen and then make final decisions on the chart.

Funnymentals are ok if you are inside the tent pissing out. TA is best if you want to go for a pee and stay dry.

gg


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## tech/a (18 November 2007)

Maybe this example on TLM (In the JMS thread) may help those Fundies who are at a loss with some of us using T/A.

A combination of the 2 can be very powerful in my view.

https://www.aussiestockforums.com/forums/showthread.php?p=225107#post225107


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