Technical Analysis vs. Fundamental Analysis

[Value Hunter]

Some of the advantages of fundamental compared to technical investing/trading are:
-Fundamental investing is typically less time intensive as you do heavy research when you make a buy or sell decision then years of minimal maintenance research to stay on top of the story. If you have a concentrated portfolio and low portfolio turnover you can end up investing millions of dollars with a fairly modest number of hours per year maintaining the portfolio. In fact in some cases I can go months at a time without doing any work/research. I feel sorry for all those technical traders who spend hours per day glued to a screen.
-Fundamental investing typically has lower portfolio turnover resulting in potentially: lower/less taxes paid, less brokerage paid and paying less in accounting fees and doing less associated document keeping/filing work. A technical trader with higher portfolio turnover must therefore achieve a higher gross return to get the same net return as a low portfolio turnover fundamental guy.
-You can invest in highly Illiquid micro-cap stocks because you do not need to be able to jump in and out at a moment's notice and can afford to be patient about exiting your position. Many technical traders won't touch thinly traded stocks. This gives fundamental guys a bigger potential universe to invest in.

 

[craft]

Some of the advantages of fundamental compared to technical investing/trading are:
-Fundamental investing is typically less time intensive as you do heavy research when you make a buy or sell decision then years of minimal maintenance research to stay on top of the story. If you have a concentrated portfolio and low portfolio turnover you can end up investing millions of dollars with a fairly modest number of hours per year maintaining the portfolio. In fact in some cases I can go months at a time without doing any work/research. I feel sorry for all those technical traders who spend hours per day glued to a screen.
-Fundamental investing typically has lower portfolio turnover resulting in potentially: lower/less taxes paid, less brokerage paid and paying less in accounting fees and doing less associated document keeping/filing work. A technical trader with higher portfolio turnover must therefore achieve a higher gross return to get the same net return as a low portfolio turnover fundamental guy.
-You can invest in highly Illiquid micro-cap stocks because you do not need to be able to jump in and out at a moment's notice and can afford to be patient about exiting your position. Many technical traders won't touch thinly traded stocks. This gives fundamental guys a bigger potential universe to invest in.

Much better to see you putting up some pro's rather than stupid attacks. You probably don't need to feel sorry for the technical guys, that don't all screen watch, some have longer time frames and probably only place entries EOD some have automated systems and some probably LOVE screen watching. (hell some might even tuck away a few G in a few hours and go surfing for the rest of the day - who knows)

As you seem pretty convinced about FA, it might actually be more useful to think about and challenge yourself with some of the Cons rather than just reinforcing the Pro's - Hey you never know you could become an interesting contributor.

 

[Value Hunter]

Craft the cons of fundamental investing are:

-It often takes years to know if you are right or wrong.

-Its not harder to know when to sell. Many fundamental guys who do a good job in buying are bad at selling. Its easy to get caught in a value trap:

For example if you buy shares in XYZ corporation for $1.00 and value them at $1.50. The company a few months later comes out with a profit downgrade and the shares drop to $0.90. You however decide after considered analysis that it is still a good business and that the shares now have an intrinsic value of $1.20 and the market has overreacted. The shares are therefore undervalued at the new price and you decide to average down and buy more shares. Over the next few months the shares drift to $0.75 and you buy even more shares. A few months later down the track the company comes out with another profit downgrade. The shares have by now dropped to $0.40. After careful analysis you decide the company is now on a downward spiral and you made a mistake in buying. You cut your losses and sell your shares for $0.40 losing a good deal of money along the way. I'm pretty sure every fundamental investor (myself included) has had some sort of experience like this at one point. If you have a very concentrated portfolio and its a large position this can damage your returns severely and it could take you years to recover from it.

 

[DaveDaGr8]

That's just plain bad portfolio management and has nothing to do with your trading style. You deserve to be slapped if you do this

 

[Boggo]

That's just plain bad portfolio management and has nothing to do with your trading style. You deserve to be slapped if you do this

x 2

 

[get better]

I think there is a misconception about billionaires making their wealth from fundamental investing alone. Particularly Warren Buffet. If you read about his history, he actually started generating his wealth from managing and building businesses that he owned. One of the things he doesn't get enough credit for is that he is a fantastic at managing people. This skill has helped him immensely in building Berkshire Hathaway into what it is now. This is far different from purely investing based on fundamentals (at least, the way it is viewed in public).

I haven't checked myself but I wouldn't be surprised if these other billionaires were the same, they most likely had made their wealth via some other venture instead of investing. Investing helps them maximise their money to make more money.

 

[Value Hunter]

Guys would you please explain how a fundamental investor who does not use a stop loss and buys based on the descrepancy between price and value would avoid a loss like this? I must admit these days I generally tend not to buy shares immediately after a profit downgrade. If I already own shares then I will refrain fdom buying more. I usually try to wait for the earnings trend to turn upwards again before I buy (the old downgrades come in threes story). I may make some exceptions in unusual circumstances but as a matter of habit I will usually will not do it. To avoid the example I gave in the scenario.

 

[cynic]

Guys would you please explain how a fundamental investor who does not use a stop loss and buys based on the descrepancy between price and value would avoid a loss like this? I must admit these days I generally tend not to buy shares immediately after a profit downgrade. If I already own shares then I will refrain fdom buying more. I usually try to wait for the earnings trend to turn upwards again before I buy (the old downgrades come in threes story). I may make some exceptions in unusual circumstances but as a matter of habit I will usually will not do it. To avoid the example I gave in the scenario.

Have you explored the possibility of hedging your portfolio exposure with derivatives?

 

[hamli]

Guys would you please explain how a fundamental investor who does not use a stop loss and buys based on the descrepancy between price and value would avoid a loss like this? I must admit these days I generally tend not to buy shares immediately after a profit downgrade. If I already own shares then I will refrain fdom buying more. I usually try to wait for the earnings trend to turn upwards again before I buy (the old downgrades come in threes story). I may make some exceptions in unusual circumstances but as a matter of habit I will usually will not do it. To avoid the example I gave in the scenario.

I can only suggest that you chip away at your cost basis. Based on what I've read, you are a fundamentalist, like long stock and want to participate in any significant up moves of that stock and won't mind buying more at a particular price which you determine to be of value.

The typically advertised "covered call" strategy doesn't cater for the above. However, you can vary this by selling a call spread instead & a naked put at the same time. This will allow you to participate in large up moves (i.e past the long call option) and buy more at your put strike price and at the same time, collect premium, which will reduce the 'effective cost' of your stocks.

Alternatively, if you do it by the "books", you can buy puts to protect your stock, but I cannot see the latter as a winning strategy.

Or if the shares that you are investing in do not have liquid options, but all fall into the same sector, then look to see if there are ETFs in that sector that have liquid options. Then as a partial hedge, you can sell call options on the ETF; Or if they have strong correlations to the market index then sell calls on the market index to supplement your long as a partial hedge.

You will need to determine what position sizes appropriate as a partial hedge.

 

[Value Hunter]

I don't use derivatives.

 

[hamli]

Would you say that to some extent, 'Technical Analysis' is like art? Or do most of you have your preset indicators and interpret them as 'black and white' and wait for textbook examples before you enter a trade.

I'm just curious and starting to do some light reading in TA.

 

[pixel]

Would you say that to some extent, 'Technical Analysis' is like art? Or do most of you have your preset indicators and interpret them as 'black and white' and wait for textbook examples before you enter a trade.

I'm just curious and starting to do some light reading in TA.

If by "art" you mean "a discipline that you have to study and adjust to your style (of trading/ investing)" then I would say Yes. No standard set of indicators can be considered as a black-and-white, yes/no, buy-here/ sell-there instruction. No matter how many conditions you put into an algorithm, you will only be able to improve your performance statistically. That is why I shun the term "prediction" as in "Where does your T/A predict XYZ's share price to be next week?" (F/A can't give you that assurance either, regardless how many value-picking eggspurts tell you otherwise.)

I use T/A as a "look at me!" alert. T/A software allows me to scan the entire market quickly for stocks that meet a combination of certain condition. Statistically, I have found this set of conditions associated with more successful trade entries. And when a chart shows me that a particular stock has reacted consistently to a my selected combination of conditions in the past, it's long odds it will do so again.

Keep reading and asking questions. In the end, you may still decide it's not your cuppa tea, but you will make the decision from an informed position, not based on bias or ignorance.

 

[luutzu]

Would you say that to some extent, 'Technical Analysis' is like art? Or do most of you have your preset indicators and interpret them as 'black and white' and wait for textbook examples before you enter a trade.

I'm just curious and starting to do some light reading in TA.

FA is also "art" in the sense that simple reliance on financial ratios just won't cut it.

In my opinion, TA is purely interested in dealing with the market and its actions whereas FA, as generally practised, tries to deal with the market and a bunch of other bs that may or may not be at all relevant.

To me, a much sounder approach, one within the reach of an individual investor's time and resources for research and understanding, is to see stocks as a Business - and so make investment decision on it as one would when considering a private business.

Ask not what the Market will do; ask where's the money.

Ask not what the interest rate and economic policies will be; ask whether the company is able enough to adapt and survive the changes.

We therefore chose to analyze stock as a business; Not because it is easy, but because it is hard. And hard work done well by you is how you get the money.

 

[Ves]

Sometimes people miss the point entirely.

Difference in opinion / method = increased opportunity.

For every time I'm right in the market, I'm equally relying on someone to be wrong (well if I want to be a buyer I need a seller).

In other words, there is no reason to "convert" another person to be a "Fundie" or a "Techie."

Happy to help others if they ask, but hell, if they don't want my help then it's better not to complain.

 

[Rainman]

Something that I'd like the dye-in-the-wool TA guys to reveal is just what their annual returns are over a 3, 5, 7 and 10 year period.

In the end, consistent, market-beating annual returns are what determines whether an FA or TA approach is the superior approach.

On a related note, it seems to me that if you are a pure technical analyst your focus on price action rather than on value means that you can never allow yourself to be convinced about a trade or an investment. You are always looking to get out as soon as the trend ends which, for a TA guy, is an ever present possibility. Hence the importance of stop losses. I imagine (although I am happy to stand corrected) that this view of all stocks as either in an up-trend, a down-trend or treading water precludes you from ever looking upon a stock as a bet-the-farm kind of opportunity.

Yet, in my view, the big money and the superior annual returns are achieved by precisely these kind of opportunities where the downside is limited but where the upside is, if not unlimited, pregnant with the possibility of doubling, tripling or quadrupling your investment.

In this regard, I'm reminded of a remark made by Stanley Druckenmiller, a guy who achieved a 30% annual return for 20 plus years. Druckenmiller said:

"The first thing I heard when I got in the business [of investment management].... was bulls make money, bears make money, and pigs get slaughtered. I'm here to tell you I was a pig. And I strongly believe the only way to make long-term returns in our business that are superior is by being a pig".

What Druckenmiller meant by "being a pig" was betting the farm on those rare opportunities that come along and promise outsized returns. Again, I am happy to stand corrected but it seems to me that TA guys, perhaps through an acute sense of self-preservation, can never let themselves be pigs in relation to position sizing because they tend not to accept the notion that an investment opportunity can be anything other than price action subject to the whims of transitory market trends.

 

[minwa]

Something that I'd like the dye-in-the-wool TA guys to reveal is just what their annual returns are over a 3, 5, 7 and 10 year period.

In the end, consistent, market-beating annual returns are what determines whether an FA or TA approach is the superior approach.

Let's do it. Post yours since you suggested it and I'll post mine.

On a related note, it seems to me that if you are a pure technical analyst your focus on price action rather than on value means that you can never allow yourself to be convinced about a trade or an investment. You are always looking to get out as soon as the trend ends which, for a TA guy, is an ever present possibility.

Being convinced or not is different to being profitable. Pick one. Like it or not - everyone intends to trade trends, TA or FA. For a profit to be made, a trend has to be established. Everyone's definition of trend is different but by the very basic definition, you cannot sell for higher than you bought for without a trend. I would not deem someone as sane if they deem the trend to be down and still stay in it - TA or FA. You may argue it's still undervalued, which makes no sense, seeing you already valued it lower by forecasting a down trend. Trend is no exception to TA or FA.

precludes you from ever looking upon a stock as a bet-the-farm kind of opportunity.

Yet, in my view, the big money and the superior annual returns are achieved by precisely these kind of opportunities where the downside is limited but where the upside is, if not unlimited, pregnant with the possibility of doubling, tripling or quadrupling your investment.

Lots of people/funds "bet the farm". Lots of them go broke. Of course you only hear about the minority successful ones. Just like gambling, majority lose but its the minority lucky ones that attention are paid to. If you want to treat investing as gambling and "bet the farm" on red or black, that's your decision, not a very smart one.

In this regard, I'm reminded of a remark made by Stanley Druckenmiller, a guy who achieved a 30% annual return for 20 plus years.

Am I supposed to be impressed by this ? I can also grab the Market Wizard books and point out a few guys who use TA with much higher return pa.

 

[pixel]

Something that I'd like the dye-in-the-wool TA guys to reveal is just what their annual returns are over a 3, 5, 7 and 10 year period.

You just don't seem to get it:
Why on Earth should I have to justify my choice of trading method to you and others like you?
You chose a different tack, as is your right in a free marketplace; it's no skin off my nose.
Should we ever meet in a trade on different sides, which is irrelevant in itself because ASX trading logs don't reveal individuals, these are the possible outcomes:

• I buy shares off you and the share price goes up: Plus for me. You make less profit than you could've.
• I buy shares off you and the share price goes down: Plus for you. I'll stop out containing my loss.
• I sell shares to you and the share price goes up: Plus for you. I decide whether to buy back up or move on.
• I sell shares to you and the share price goes down: Plus for me. You paid too much.

If, over time, either of us collects not enough Pluses and fails to adjust his style, does it say anything about the methodology he has chosen? Of course not!

If you buy a hammer and keep smashing your thumb, by all means buy a nail gun. Just be aware that your being ham-fisted could cause you to shoot yourself in the foot. My publishing a statistic about how many nails I hammered straight into the right place won't make you any less ham-fisted. Nor will it prove whether the hammer or the nail gun is a better tool.

 

[Rainman]

Let's do it. Post yours since you suggested it and I'll post mine.

Calm down, supertrader! First, it was not a suggestion to TA guys on my part. It was an invitation. Second, if you don't want to reveal what your own personal long term performance is, why don't you just give an indication of what sort of consistent annualised return you'd consider satisfactory over a 3, 5 or 10 year period?

Lots of people/funds "bet the farm". Lots of them go broke. Of course you only hear about the minority successful ones. Just like gambling, majority lose but its the minority lucky ones that attention are paid to. If you want to treat investing as gambling and "bet the farm" on red or black, that's your decision, not a very smart one.

I'll take it from that that you don't take "bet-the-farm" positions. Which proves my point.

Am I supposed to be impressed by this ?

Yeah, right. That was the whole the reason that I cited Druckenmiller: to impress you.

 

[hamli]

It's funny how everyone takes these discussions as personal attacks.

Be open minded, learn both TA and FA and use both/either, whatever works for you.

 

[Rainman]

You just don't seem to get it:
Why on Earth should I have to justify my choice of trading method to you and others like you?

I have no interest in you justifying your "choice of trading method" to me. No interest whatsoever. But that is not the issue. The issue is the return that different investment styles produce.

I would have thought that it is self-evident that the investment style that produces the consistently higher return over the long term is pretty convincing evidence that that style has an edge over the style that produces lower returns over the long term.

If you don't agree that the name of the game is consistent market-beating returns over the long term, then you are on a different planet to me - amateur planet.