Technical Analysis vs. Fundamental Analysis

So_Cynical · 19 October 2010

robusta something that you must accept is that there's alot of trend followers on this forum (i call em trendy's ) in general these people buy trends and do that via whatever instrument is appropriate...while some types of trend following could be considered investing, on the whole its probably not realistic to call trendy's investors.

While im mostly in agreement with your comments re Mr market etc, i can also see the logic behind trend following and understand that both methods can be profitable....prob best to keep in mind that there's buyers and seller at all price levels, for all sorts of reasons.

1 good thing about trend following is that its a discipline that anyone can learn, while not all personality's are ideally suited to following that discipline.

Boggo · 19 October 2010

robusta said:
"Graham wrote that the owner of equity stocks should regard them first and foremost as conferring part ownership of a business. With that perspective in mind, the stock owner should not be too concerned with erratic fluctuations in stock prices, since in the short term, the stock market behaves like a voting machine, but in the long term it acts like a weighing machine (i.e. its true value will in the long run be reflected in its stock price). "

And that my friend is the mentality that has kept TLS holders hanging on to a dog when they should have had their money working for them.

On the subject of TLS, MacQuarie Private Wealth has maintained a "hold" on it for some time now, they just keep reducing the value price, last reduction was on Oct 11th, "Our price target has been reduced from $3.15 a share to $2.95."

Your quote is correct

robusta said:
(i.e. its true value will in the long run be reflected in its stock price). "

Different strokes for different folks though I guess.

robusta · 19 October 2010

Boggo said:
And that my friend is the mentality that has kept TLS holders hanging on to a dog when they should have had their money working for them.

On the subject of TLS, MacQuarie Private Wealth has maintained a "hold" on it for some time now, they just keep reducing the value price, last reduction was on Oct 11th, "Our price target has been reduced from $3.15 a share to $2.95."

Different strokes for different folks though I guess.

Could not agree more Boggo

On the subject of TLS any company that borrows to pay dividends would not ever come up on my radar as investment grade.

motorway · 20 October 2010

robusta said:
Sorry to bring back this ancient thread but I have recieved a few comments on my post's like: Why bother crunching numbers?, It's all priced in the sp just follow the trend.....

Now first let me state I am not arguing against technical analysis but explaining why I prefer Fundamental Analysis for my money.

"Graham's favorite allegory is that of Mr. Market, a fellow who turns up every day at the stock holder's door offering to buy or sell his shares at a different price. Often, the price quoted by Mr. Market seems plausible, but often it is ridiculous. The investor is free to either agree with his quoted price and trade with him, or to ignore him completely. Mr. Market doesn't mind this, and will be back the following day to quote another price. The point is that the investor should not regard the whims of Mr. Market as determining the value of the shares that the investor owns. He should profit from market folly rather than participate in it. The investor is best off concentrating on the real life performance of his companies and receiving dividends, rather than being too concerned with Mr. Market's often irrational behavior."

Ok if you doubt the Mr Market allegory explain to me how CBA sp has fluctuated between $60.00 and $47.05 YTD.

The underlying business has not changed that much. Does Europe debt crisis and American recession really impact CBA's long term profitability?

"Graham wrote that the owner of equity stocks should regard them first and foremost as conferring part ownership of a business. With that perspective in mind, the stock owner should not be too concerned with erratic fluctuations in stock prices, since in the short term, the stock market behaves like a voting machine, but in the long term it acts like a weighing machine (i.e. its true value will in the long run be reflected in its stock price). "

This is where it gets exciting, we know if we own part of a great business and that business by definition is delivering increasing profits the share price will eventually follow.

Now to really turbo charge your returns concentrate only on the top 1-2% quality companies and only buy them when they are under valued.

And a Chart is a record of the Pathology of Mr Market !

===>

''You cannot manage what you do not measure'' Peter Drucker

or take optimum advantage of--

You Cannot Make Money In A Stock By Yourself

http://www.clayallen.com/MD_NEWS_V9_I4.pdf

Motorway

Julia · 20 October 2010

robusta said:
Julia what you are failing to 'get' is I am not dismissing trend folllowing or TA in general I have stated I believe it is a valid investment option.

So you did. I should have read your post more carefully. Sorry.

The CBA example is to explain how value investing can take advantage of marker irrationality and fluctuations.

What does this statement actually mean?
Perhaps you could - using CBA - give a practical example of how 'value investing' is taking advantage of marker (market?) irrationality?
Do you simply mean buying in during dips?

Maybe this is not the best medium to comminicate on I have only ever stated for MY money I am the most comfortable following Graham, Buffet et al.

And there are many who feel the same. When I started out, I also liked the theory, but found in practice my investment could just sit there doing nothing while I waited for the rest of the market to wake up to the brilliance of the company.

This is where it gets exciting, we know if we own part of a great business and that business by definition is delivering increasing profits the share price will eventually follow.

This is the bit I have difficulty with. Perhaps the SP will indeed eventually follow, but until it does your money is just losing the opportunity to be gainfully engaged with another, rising, stock. That's the advantage imo of trends. Let the profits run and keep your losses small.

If we never had a difference of opinion how would we ever learn anything?

I stick by my arguement that my 'that' style of investing is the best and further more would love to be proved wrong - would you?

There you go, robusta: you're alleging that your style of investing is the best.
It may be best for you, but it's absolutely not best for everyone. We'll all choose a style which fits our personality and experience, in addition to obviously being what we believe is the most profitable.

Would I love to be proved wrong? I'm not interested in being proved right or wrong by anyone else's judgement other than my own. I've tried various approaches and have settled on a mix which suits me. I've no interest in wanting anyone else to adopt my approach. I was simply suggesting that you might find if you broadened your view about possible approaches, you might find value in other than just so called value investing.

But hey, I don't care one way or the other.

So_Cynical said:
robusta something that you must accept is that there's alot of trend followers on this forum (i call em trendy's ) in general these people buy trends and do that via whatever instrument is appropriate...while some types of trend following could be considered investing, on the whole its probably not realistic to call trendy's investors.

While im mostly in agreement with your comments re Mr market etc, i can also see the logic behind trend following and understand that both methods can be profitable....prob best to keep in mind that there's buyers and seller at all price levels, for all sorts of reasons.

1 good thing about trend following is that its a discipline that anyone can learn, while not all personality's are ideally suited to following that discipline.

Good post, So Cynical. Wow, don't get to say that too often.

So_Cynical · 20 October 2010

motorway said:
And a Chart is a record of the Pathology of Mr Market !

===>

''You cannot manage what you do not measure'' Peter Drucker

or take optimum advantage of--

You Cannot Make Money In A Stock By Yourself

http://www.clayallen.com/MD_NEWS_V9_I4.pdf

Motorway

No disrespect motorway...but the has to be one of the most silly things ive ever read i mean seriously.

"Portfolios heavy with under performing stocks almost never outperform the market....Ignat’s Law"

Well..no **** Sherlock.

motorway · 20 October 2010

His point is that many continue to hold portfolios of under performing stocks
(for some good? reason ) as if ,they did expect to outperform with them..

Maybe because,
of the Fundamentals
The broker recommendation
it is down
it is up
etc.

It is for anything==> But the performing
and here he means the trend vs all other stocks

The point is why invoke Mr Market
and then not keep tabs on him with charting and trend analysis ?

Motorway

robusta · 20 October 2010

Julia said:
Perhaps you could - using CBA - give a practical example of how 'value investing' is taking advantage of marker (market?) irrationality?
Do you simply mean buying in during dips?

I guess it could be looked at buying the dips. If I work out CBA has a intrinsic value of $54.00, the sp drops to $48.00 I buy and wait for the market to price the business at fair value.

And there are many who feel the same. When I started out, I also liked the theory, but found in practice my investment could just sit there doing nothing while I waited for the rest of the market to wake up to the brilliance of the company.

This is where we differ. The price will eventually revert to the value of the underlying business, so if I can buy a business with a rising value at a bargain price eventually the price will catch up.

This is the bit I have difficulty with. Perhaps the SP will indeed eventually follow, but until it does your money is just losing the opportunity to be gainfully engaged with another, rising, stock. That's the advantage imo of trends. Let the profits run and keep your losses small.

Good luck and I am sure this technique makes a lot of people a lot of money. For me the return will be very satisfactory when the market finally catches up to the performance of great businesses.

There you go, robusta: you're alleging that your style of investing is the best.

It may be best for you, but it's absolutely not best for everyone. We'll all choose a style which fits our personality and experience, in addition to obviously being what we believe is the most profitable.

You are correct I believe this technique is the best for me.

Would I love to be proved wrong? I'm not interested in being proved right or wrong by anyone else's judgement other than my own. I've tried various approaches and have settled on a mix which suits me. I've no interest in wanting anyone else to adopt my approach. I was simply suggesting that you might find if you broadened your view about possible approaches, you might find value in other than just so called value investing.

Thankyou I guess that is why I am on this thread, if I learn something or even better if someone can convince me of the merits of an alternate technique the bottom line is it is going to make me some money.

But hey, I don't care one way or the other.

Good post, So Cynical. Wow, don't get to say that too often.

Allways appreciate your opinion So Cynical (just don't allways agree with it)

Julia how do you do that multi quote thing like your reply to my quote?

Synergy · 20 October 2010

I have a couple of issues with fundamental analysis...

Example...
You buy a stock based on the information currently available to the market. The share price falls, with no information released to the market... You're holding exactly the same company, at a lower price. No dramas. The price continues to fall lower and lower.... But it's the same company, isn't it?

When does the share price fall so far that it is no longer the same company?

When is your analysis proved wrong?

Do you wait until the company releases news stating that their profits will be lower this year? Or that they're raising capital? before deciding it's not the same company anymore.

If you believe in purely fundamental analysis, then having a stop loss doesn't really make sense (it's still a good company), and averaging down makes a lot of sense. The same company at a cheaper price is surely a better buy than your initial purchase right??

Buying based on fundamental analysis means you think the share is either undervalued currently or you think it will increase in value in the future. Either way, from your analysis you believe you are 'right' when making the buy, otherwise you wouldn't make the trade.
With technical trading - especially mechanical trading, it's not about being right when you buy, it's about being right in the long term, knowing that doing the same thing over and over will lead to profits. Whether you're right or wrong on any individual trade is of no real concern.
I feel that with fundamental trading you're going into a trade thinking you're right, then having no real way to determine when your wrong. Mentally challenging at best.

Boggo · 20 October 2010

Synergy said:
Buying based on fundamental analysis means you think the share is either undervalued currently or you think it will increase in value in the future. Either way, from your analysis you believe you are 'right' when making the buy, otherwise you wouldn't make the trade.

OneTel springs to mind in this topic.

The good old "It has to be good, Kerry and Rupert are investing in it" mob were all over it.

One fundamental positive that did come out of that was the fundamental analysts at StockDoctor identified it as a basket case and kept their clients out of it much to the disgust of KP at the time.

http://en.wikipedia.org/wiki/One.Tel

robusta · 20 October 2010

Synergy said:
I have a couple of issues with fundamental analysis...

Example...
You buy a stock based on the information currently available to the market. The share price falls, with no information released to the market... You're holding exactly the same company, at a lower price. No dramas. The price continues to fall lower and lower.... But it's the same company, isn't it?

When does the share price fall so far that it is no longer the same company?

When is your analysis proved wrong?

Do you wait until the company releases news stating that their profits will be lower this year? Or that they're raising capital? before deciding it's not the same company anymore.

If you believe in purely fundamental analysis, then having a stop loss doesn't really make sense (it's still a good company), and averaging down makes a lot of sense. The same company at a cheaper price is surely a better buy than your initial purchase right??

Buying based on fundamental analysis means you think the share is either undervalued currently or you think it will increase in value in the future. Either way, from your analysis you believe you are 'right' when making the buy, otherwise you wouldn't make the trade.
With technical trading - especially mechanical trading, it's not about being right when you buy, it's about being right in the long term, knowing that doing the same thing over and over will lead to profits. Whether you're right or wrong on any individual trade is of no real concern.
I feel that with fundamental trading you're going into a trade thinking you're right, then having no real way to determine when your wrong. Mentally challenging at best.

You make some very good points Synergy.

The price in the short term often has nothing to do with the performance of the company. I need to make a distinction between price and value. Price is what I pay, value is what I get.

I have to wait until news is released to the market to prove my analysis wrong, this makes me more disciplined in company selection.

Good point about being right in the long term, that is the key for both techniques.

Right again about the stop losses - I don't have any.

Also right again about the averaging down. Never do this lightly but if you proceed with due dilligence the results can be very satisfactory.

Boggo said:
OneTel springs to mind in this topic.

The good old "It has to be good, Kerry and Rupert are investing in it" mob were all over it.

One fundamental positive that did come out of that was the fundamental analysts at StockDoctor identified it as a basket case and kept their clients out of it much to the disgust of KP at the time.

http://en.wikipedia.org/wiki/One.Tel

Good point about OneTel so much money in a company that never turned a profit. Would never make it into my portfolio.

robusta · 20 October 2010

Being a fundamental investor I miss out on many opportunities to make money open to technical investors.
A quick glance at the ASX Top 20 reveals 11 companies that will for one reason or another probably never be considered as investment candidates. (AMP, BXP, FGL, MQG, NCM, ORG, RIO, SUN, TLS, WDC, WPL).

Over the entire ASX I estimate only about 10% of companies tick enough of my boxes for me to consider them. I am sure a lot of investors have made a lot of money out of the above stocks.

From a technical point of view this creates a huge opportunity cost. At any given time there must be numerous stocks in the middle of a huge up-trend or hitting key resistance points.... you fill in the blanks.

As I have previously explained the technique I follow consists of identifying exceptional businesses, buying them for less than they are worth and holding those businesses until either they become significantly over valued or cease to be exceptional businesses.

I thought it may be interesting to list 6 businesses that meet my criteria and I think should out perform the market in the long term.
Disclosure 4 of these stocks are also in Roger Montgomery's Valeline portfolio.
These businesses are all about or below current intrinsic values.

If I assume a equally weighted portfolio and track it against the ASX 200 it should be interesting to see the results over the medium to long term.

It would also be interesting to get any input from any other points of view to see any correlation between different investment techniques. Or if anyone wants to put up a alternative portfolio?

CBA $50.50
CSL $32.50
JBH $19.59
MCE $4.95
FGE $4.05
FRI $1.40

Portfolio total $112.99 ASX 200 4694.90 20/10/2010

So_Cynical · 20 October 2010

Synergy said:
I have a couple of issues with fundamental analysis...

Example...
You buy a stock based on the information currently available to the market. The share price falls, with no information released to the market... You're holding exactly the same company, at a lower price. No dramas. The price continues to fall lower and lower.... But it's the same company, isn't it?

When does the share price fall so far that it is no longer the same company?

When is your analysis proved wrong?

Do you wait until the company releases news stating that their profits will be lower this year? Or that they're raising capital? before deciding it's not the same company anymore.

If you believe in purely fundamental analysis, then having a stop loss doesn't really make sense (it's still a good company), and averaging down makes a lot of sense. The same company at a cheaper price is surely a better buy than your initial purchase right??

Buying based on fundamental analysis means you think the share is either undervalued currently or you think it will increase in value in the future. Either way, from your analysis you believe you are 'right' when making the buy, otherwise you wouldn't make the trade.
With technical trading - especially mechanical trading, it's not about being right when you buy, it's about being right in the long term, knowing that doing the same thing over and over will lead to profits. Whether you're right or wrong on any individual trade is of no real concern.
I feel that with fundamental trading you're going into a trade thinking you're right, then having no real way to determine when your wrong. Mentally challenging at best.

All very valid points of course and not the first time ive read them, and every time i read them i get an overwhelming feeling that trend following and mechanical trend following in particular is very much about decision avoidance and acceptance of losses.

Trendy's seem to want to treat the market (ASX) like 2000 roulette wheels (with no numbers) all spinning at once or perhaps more like 2000 events that somehow randomly trend, they seem to use the unpredictability of the market as an excuse to not bother trying to understand it..a few Homer Simpson quotes come to mind.

“Trying is the first step to failure”
“You tried your best and failed miserably. The lesson is: never try.”
“If at first you don't succeed, give up.”

Just thinking back over the last 3 years i can honestly say that every time ive averaged down (except for 2 times) i have substantially reduced my open losses and 4 times i have pretty much turned a losing trade/position into a neutral/winning trade....what i love about the stock market is that there's so much information, there's so many variables.

i love building a picture of a stock in my mind as i read thru reports and announcements, charts and stats...that's the best bit, well not true because the best bit is getting it right and coming out the other end winning...like i did today with IMF, i watched for over a year, waited, saw a potential bottom 4 weeks ago and after a 2 or 3 hour final research session i jumped in...out today with a 10% profit, no trend needed.

So_Cynical · 20 October 2010

robusta said:
Disclosure 4 of these stocks are also in Roger Montgomery's Valeline portfolio.

It would also be interesting to get any input from any other points of view to see any correlation between different investment techniques. Or if anyone wants to put up a alternative portfolio?

CBA $50.50
CSL $32.50
JBH $19.59
MCE $4.95
FGE $4.05
FRI $1.40

Portfolio total $112.99 ASX 200 4694.90 20/10/2010

Why did you leave out PTM?

Give me a day or 2 and ill put 6 of my portfolio stocks up against yours. :

robusta · 20 October 2010

So_Cynical said:
Why did you leave out PTM?

Give me a day or 2 and ill put 6 of my portfolio stocks up against yours. :

Will look forward to it.

Disclosure I hold the 6 stocks in this portfolio but never managed to pick up PTM at a cheap enough price.

Well done with IMF by the way, I am lightyears from being able to pull off a trade like that.

Julia · 20 October 2010

robusta said:
Julia how do you do that multi quote thing like your reply to my quote?

See this thread:
https://www.aussiestockforums.com/forums/showthread.php?t=2737
Do learn how to do it. It makes replying to a post much easier and much clearer for readers.

robusta said:
Being a fundamental investor I miss out on many opportunities to make money open to technical investors.

So why are you so happy to accept these lost opportunities?

Over the entire ASX I estimate only about 10% of companies tick enough of my boxes for me to consider them. I am sure a lot of investors have made a lot of money out of the above stocks.

I'd say not all of them by any means. WDC is a good example of a stock widely quoted to be necessarily included in any basic p/f but just looking at the last three years it has been in a downtrend then flat for some time.
Doubt too many have made too much from this.

From a technical point of view this creates a huge opportunity cost. At any given time there must be numerous stocks in the middle of a huge up-trend or hitting key resistance points.... you fill in the blanks.

Quite so. But you still are telling us value investing is better!

As I have previously explained the technique I follow consists of identifying exceptional businesses, buying them for less than they are worth and holding those businesses until either they become significantly over valued or cease to be exceptional businesses.

Yeah, yeah, we all know the definition.

I thought it may be interesting to list 6 businesses that meet my criteria and I think should out perform the market in the long term.
Disclosure 4 of these stocks are also in Roger Montgomery's Valeline portfolio.
These businesses are all about or below current intrinsic values.

If I assume a equally weighted portfolio and track it against the ASX 200 it should be interesting to see the results over the medium to long term.

It would also be interesting to get any input from any other points of view to see any correlation between different investment techniques. Or if anyone wants to put up a alternative portfolio?

CBA $50.50
CSL $32.50
JBH $19.59
MCE $4.95
FGE $4.05
FRI $1.40

Portfolio total $112.99 ASX 200 4694.90 20/10/2010

Now this actually becomes interesting with regard the last three, all of which look very healthy indeed. How did you come up with these, robusta?
Seems like an instance where trend following and 'value investing' might coincide.

CSL is another that seems to be dumped into most p/f's, despite it being flat for three years.

JBH was a fantastic buy if you bought it Nov 09. Not so keen on it now.

What does this mean:

Portfolio total $112.99 ASX 200 4694.90 20/10/2010

What does the $112.99 refer to?

So_Cynical said:
All very valid points of course and not the first time ive read them, and every time i read them i get an overwhelming feeling that trend following and mechanical trend following in particular is very much about decision avoidance and acceptance of losses.

What absolute nonsense.
Decision avoidance? On the contrary it's absolutely about making a decision about when to enter and exit.

But if it turns out to be a wrong decision, then yes absolutely I'll accept a small loss, rather than watch a stock viz. TLS descend into oblivion.

Trendy's seem to want to treat the market (ASX) like 2000 roulette wheels (with no numbers) all spinning at once or perhaps more like 2000 events that somehow randomly trend, they seem to use the unpredictability of the market as an excuse to not bother trying to understand it..a few Homer Simpson quotes come to mind.

You're absolutely entitled to choose your own method, but there's no need to sneer at alternative approaches. I'm resisting the temptation to recall some of your previously posted profits which many trend followers would consider immaterial.

i love building a picture of a stock in my mind as i read thru reports and announcements, charts and stats...that's the best bit, well not true because the best bit is getting it right and coming out the other end winning...like i did today with IMF, i watched for over a year, waited, saw a potential bottom 4 weeks ago and after a 2 or 3 hour final research session i jumped in...out today with a 10% profit, no trend needed.

In the meantime, instead of watching something for over a year, and doing all that tedious research, you could have been in and out of multiple stocks with more than a 10% profits each time if you took a different approach.

But hey, so cynical, glad you have a method which makes you happy.
That's all any of us aspire to, I guess. Just that we have different criteria for happiness.

(I knew it was a fluke that I actually agreed with one of your previous posts!)

So_Cynical · 20 October 2010

Julia said:
You're absolutely entitled to choose your own method, but there's no need to sneer at alternative approaches. I'm resisting the temptation to recall some of your previously posted profits which many trend followers would consider immaterial.

I really wasn't sneering, just stating my observations of trend following without malice.

-------------

While many of my profits may be small they are also consistent, and because there consistent they don't have to be spectacular...any time i can make 10% on a trade in 4 weeks ill take it, because that's how my portfolio has grown by 34% in the last 12 months.

Trendy's need to make the most of there winners because they have so many losers....i can take 10 and 15% profits because i have lots of winners and the sooner i turn my money over the sooner i get the next winner.

By the way Julia...hows that 8% Term deposit working out for you? :

So_Cynical · 20 October 2010

robusta said:
It would also be interesting to get any input from any other points of view to see any correlation between different investment techniques. Or if anyone wants to put up a alternative portfolio?

CBA $50.50
CSL $32.50
JBH $19.59
MCE $4.95
FGE $4.05
FRI $1.40

Portfolio total $112.99 ASX 200 4694.90 20/10/2010

Ok here is my 6 at today's close (i own stocks with *)

BPT 0.615*
CPU 9.71*
TSI 0.665*
PTM 4.75*
CIF 1.15
APN 1.95

Portfolio total $18.84 were gona include dividends in this?

brty · 21 October 2010

Just remember that comparing the performance of a few stocks with an index like the All Ords, is not very real as the index is weighted, not all stocks are equal.

Simply picking 4 or 6 stocks (unweighted) to compare to the index will end up with results all over the shop, but is likely to outperform both on the upside and downside depending on which way the index goes. The real test is if the stocks proposed outperform to the upside while the index declines.

Good luck.

brty

tech/a · 21 October 2010

The only thing that matters in my view if you hold a portfolio of 1 or 50 stocks is that over a given period you can profit from that portfolio to an extent greater than you could have invested the moneys elsewhere.

Technical Analysis vs. Fundamental Analysis

So_Cynical

The Contrarian Averager

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motorway

Julia

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The Contrarian Averager

So_Cynical

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So_Cynical

The Contrarian Averager

So_Cynical

The Contrarian Averager

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tech/a

No Ordinary Duck

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