Which one do you use? Technical or fundamental analysis?

[Julia]

Re: Which one do you use? Technical or fundamental analysis

At the risk of over-simplifying the question, on the basis that we are in the market to make money, a company's "valuation" is pretty meaningless if the market doesn't regard it as good value at the time for whatever reason.
Does it really make sense to hold on to a company which you have decided is just terrific value if no one else thinks so and hence the SP doesn't rise?

Julia

 

[Realist]

Re: Which one do you use? Technical or fundamental analysis

Does it really make sense to hold on to a company which you have decided is just terrific value if no one else thinks so and hence the SP doesn't rise

The second richest man in the world thinks so.

Infact it is impossible to buy an undervalued company any other way.

How could you buy an undervalued company if people like it and its stock price is going up?

A popular undervalued company is an oxymoron. There is no such thing.

 

[It's Snake Pliskin]

Re: Which one do you use? Technical or fundamental analysis

A popular undervalued company is an oxymoron. There is no such thing.

How true!

 

[Happy]

Re: Which one do you use? Technical or fundamental analysis

But, you don’t have to be contrarian, with some preparation you can hop on a bandwagon after they are off.

Guppy’s idea not mine, but it makes sense.

 

[Julia]

Re: Which one do you use? Technical or fundamental analysis

The second richest man in the world thinks so.

Infact it is impossible to buy an undervalued company any other way.

How could you buy an undervalued company if people like it and its stock price is going up?

A popular undervalued company is an oxymoron. There is no such thing.

Well, of course. I'm just wondering how long you are going to hold on to your undervalued company waiting for others to realise how undervalued it is and therefore start buying it, thus causing the SP to rise?

i.e. I'm simply questioning the practice of holding on to a stock which is showing no growth for 12 months or more. Wouldn't you be better off putting those funds into something which is actually appreciating and then buying into your favourite stock when you can see an upward trend happening?

btw I don't think I used the term "a popular undervalued company". Indeed, it is an oxymoron.

Julia

 

[bunyip]

Re: Which one do you use? Technical or fundamental analysis

The second richest man in the world thinks so.

Infact it is impossible to buy an undervalued company any other way.

How could you buy an undervalued company if people like it and its stock price is going up?

A popular undervalued company is an oxymoron. There is no such thing.

No, the second richest man in the world definitely does not think so. Buffet doesn't simply buy stocks that are fair value or undervalued, then sit on them forever and a day in the hope their share price will come good.
What he's done for decades is buy companies that have great prospects but are currently struggling for whatever reason....usually because of poor management.
Having aquired the entire company, or at least the majority share, he then uses his expertise as a business man to pull the compnay into shape, make it lean mean and efficent so that it starts realising its potential.

This strategy is very different to that of an investor who buys a non performing stock because his assessment is that it's cheap or is fairly valued, then he sits on it sometimes for years, hoping that one day it will start rising.
This is the 'BHP' strategy....BUY, HOLD, PRAY.....and it's one of the main reasons that so many stockmarket players barely keep their heads above water.

A far better strategy is to only buy stocks that are already performing strongly, and to hang on to them only as long as they keep performing well.
To implement this strategy you don't need to concern yourself with fair valuation or any other form of fundamental assessment.

Nick Darvas started with a $3000 stock investment in 1952 and by 1959 had made more than 2 million dollars from the stockmarket. In todays values his 2 mill would be worth somewhere around 50 to 60 million.
For the first couple of years Darvas got nothing but frustration from his efforts to make moneyfrom stocks.
He bought stocks on tips from taxi drivers, waiters, and just about anybody else who told him that such and such was a great buy. He lost money.
He employed the industry 'experts' (brokers) to tell him what to buy. He lost money.
He did his own comprehensive fundamental research with the aim of assessing the value of stocks, and he bought those he considered undervalued. He lost money.
He was just about at his wits end, thinking that he'd never crack the stockmarket game, when one day in the quote pages he came across a stock called Texas Gulf Producing. He knew nothing about this stock...he simply noticed that its price was rising strongly.
Darvas thought to himself "What the hell...everything else I've tried has failed - this one might be worth a punt, at least it's going up.
He bought the stock, and his subsequent profits were enough to recoup more than half his losses of the last couple of years.
This was the turning point in the stockmarket career of Nick Darvas. His success with this stock made him question the value of examining company reports, studying the industrial outlook, the PE ratio, the Net Tangible Assets, whether or not the stock was fairly valued. He came to the conclusion that fundamental research was a waste of time.....the most important thing in selecting stocks was to buy only those that were already rising strongly.
Darvas put his new found discovery into practice from then on....rather than attempting to assess the fundamentals of a stock, he invested purely on the basis that a stock was strongly uptrending.
The rest is history.

Bunyip

 

[nizar]

Re: Which one do you use? Technical or fundamental analysis

The second richest man in the world thinks so.

Infact it is impossible to buy an undervalued company any other way.

How could you buy an undervalued company if people like it and its stock price is going up?

A popular undervalued company is an oxymoron. There is no such thing.

The problem is; even though you see value where the market doesnt, if the stock price doesnt go up, U DONT MAKE MONEY

So unless you have 50 years to wait and billions of dollars to spend, can u afford to sit on a stock YOU THINK is undervalued waiting for the market to realise its value ??

For me, i cant, coz then i got to deal with opportunity cost; while my money is sitting in this undervalued stock not going anywhere becoz every1 is so stupid to see the value that i do; i miss out on gains elsewhere

Its much better to buy a stock already rising IMO... just as Bunyip explained regarding Nicholas Darvas's tactics...

 

[tech/a]

Re: Which one do you use? Technical or fundamental analysis

bunyip.

Buffets business ability to re build a failing company into a power house is way understated.If he had simply bought at "Undervaluation" and done nothing the result would have been similar---Nothing.
Another big difference is he didnt just buy shares---he bought the company.
With that sort of investment you can and he did make a difference.

Nizar.
Darvas is a great read.
Although a techie myself there are just as many horror stories.
Jack Schwagger reputedly lost badly when he attempted to trade futures---his favorite topic.
Turtle Traders Blew up.
Depending on who you wish to believe Gann died either a porper or rich---no one seems to be able to find his riches.

I agree that its better to buy a rising stock.
But I also believe that being out of the market at times (Completely) is a strong position to have and may well be one of a traders most profitable.

 

[happytrader]

Re: Which one do you use? Technical or fundamental analysis

I just thought I would add to this discussion afew overlooked facts.

'Charts don't lie, people do'
'The body never lies, the mouth does'

Cheers
Happytrader

 

[Realist]

Re: Which one do you use? Technical or fundamental analysis

First of all I am glad no-one agrees with me.

If most people invested my way I'd have to change.

Secondly trying to convert someones method of trading /investing is like trying to convert someones religion - why bother, it's probably in your interest that they don't invest like you anyway.

True Story...

I saw a pair of jeans in David Jones a couple of years ago, man did I love them. I tried them on, they were perfect - even if I gain a bit of weight they fit perfectly, made in Italy, real good quality tough denim, they'd last forever. But they were very expensive. Far too expensive for my liking. But you get what you pay for and they'd last forever. They were $360! I reckon I'd wear them over 1000 times that's only 30 cents a wear - excellent value maybe?

I did not buy them, but seriously I'd wander in that DJ's in Chatswood at least once a month looking at them and wondering. They were too expensive though. About 10 months later I wandered in and they were on sale, marked down by about 40%. I bought them without even trying them on - I'd done my research already.

I still have those jeans - and they fit perfectly and I wear them at least 2 or 3 times a week. I still love them. Last time I saw in DJ's they were $360.

I got them at a discount by being very patient. Was that a good buy or not?

I'm waiting to buy shares in Woolworths the same way. An excellent company that I'd love to own a piece of.

Let me know when they are on sale - I want some!! It may be years away but it will happen.

 

[bunyip]

Re: Which one do you use? Technical or fundamental analysis

Thats right Tech.....Buffet is without equal in his ability to turn underperforming companines around and convert them into financial powerhouses. That's why his appraoch is nothing even remotely similar to the approach of someone who employs the BHP (Buy Hope Pray) strategy. Buffet takes aggressive action once he buys a company, whereas the BHP brigade sit back and do nothing. The BHP strategy isn't really a strategy at all, it's merely an example of an investor being paralysed by indecision, a bit like the deer caught in the headlights of a car and being frozen to the spot, unable to make the decision to get out of the way.

Agreed about Darvas's book, it's well worth reading. But he was better at dancing and trading than he was at writing. For anyone wanting to learn more about the Darvas trading method, I suggest reading Frank Watkins book "Exploding The Myths". He devotes an entire chapter to Darvas methodology and he explains it very well, better in fact than Darvas himself explained it.

Regarding the discussion about technical analysis vs fundamental analysis, it's worth relating something that Frank Watkins said during his presentation to an ATAA meeting recently.
Frank started his presentation by asking a confronting question....."How many of you have made a return of 35% or greater from the stockmarket over the last year or so"?
Only two hands went up among the audience of more than thirty people.

His next question was "Well, why haven't you? 35% has been the rise of the All Ords over the last year or so. You could have easily outperformed the All Ords if you'd only bought stocks that were outperforming the All Ords, and you'd hung on to them only as long as they continued outperforming. And every time one of your stocks stopped outperforming, if you'd dumped it and replaced it with another outperformer. No fundamental analysis, no assessment of fair value, none of that other time consuming stuff that so many stockmarket players waste their time on.....just buy strongly uptrending stocks that are well and truly outperforming the market average ."

There is just so much wisdom in Frank's advice, yet so few investors follow it.
Perhaps the reason they don't follow it is that they tell themselves "Everyone would be doing it if it was that easy".
Perhaps the reason most investors shun this approach is that it seem just too simple, not complex enough to be any good.

I'm not sure what the reason is.....all I know is that it never ceases to amaze me that so many investors use complex analysis to achieve mediocre results, when they could be using simple analysis to achieve spectacular results.

Simple analysis can be simplified even further if you use decent trading software that enables you to overlay one chart on top of another. Decent software can also analyse hundreds of stocks in just a couple of minutes and tell you the percentage gain or loss of each stock over whatever time period you nominate.
Decent software will also allow you to scan for stocks that have a high ADX or ROAR rating. Both ADX and ROAR are trend strength indicators.
Such software enables a technical analyst to quickly and easily find the best performing stocks in the market.
While the poor old fundamental analyst is spending hours poring over company reports and doing his time consuming fundamental analysis in the hope of finding some stock worth investing in, the technical analyst sets his software scans in motion, and within a couple of minutes is presented with a list of stocks that are performing well RIGHT NOW. Not stocks that might (or might not) perform at some time in the future, he finds stocks that ARE PERFORMING WELL RIGHT NOW.

Take any strongly performing stock of the last year or two...lets use WPL as an example. If you had good scanning software it would have alerted you to WPL shortly after it started performing strongly. You coud have then overlayed the All Ords chart on the WPL chart to confirm that WPL was indeed heading north at a steeper angle than the All Ords.
You could have overlayed the WPL chart on a chart of its sector to see how it was performing relative to its sector.
Your software would have given you a report on WPL's gain over your nominated time period, so that you could compare its performance with other stocks.
The possibilites are endless when you have good software. It makes stock selection easy and efficient, and sure beats the hell out of time consuming fundamental analysis that doesn't produce anywhere near as good results.

The debate about fundamental analysis vs technical analysis is a no brainer as far as I'm concerned. If you want to consistently outperform the market then technical analysis is the way to go. But it has to be simple technical analysis, based primarily on price performance. Forget all these complex indicators that only give you a headache.

The cardinal rules are...
*Only buy rising stocks, or short falling stocks.
*Set a performance benchmark, and dump any stock that falls below that benchmark.
*Control losses but let your profits run as long as the stock keeps performing well.

Bunyip

 

[Realist]

Re: Which one do you use? Technical or fundamental analysis

unless you have 50 years to wait and billions of dollars to spend, can u afford to sit on a stock YOU THINK is undervalued waiting for the market to realise its value ??

I've got 30 years to wait and thousands of dollars to spend - that's enough for me to wait.

What he's (Buffett) done for decades is buy companies that have great prospects but are currently struggling for whatever reason

Exactly, he buys them when they are on sale. And holds onto them forever.

A far better strategy is to only buy stocks that are already performing strongly, and to hang on to them only as long as they keep performing well.

So trading is better than investing?

Tax, brokerage, effort, time, slippage and stress are 6 reasons why I don't trade.


Buffet has clearly stated that "The Intelligent Investor" is the best investment book ever written. He said he is 85% Graham (Intelligent Investor) and 15% Fishcer.

He learnt from Fishcer not to be afraid to pay a fair value or slightly too much for something that is truly excellent. Graham only buys at discount.

Here's Buffet's quote from page 548 of the Intelligent investor..

"Adding many converts to the value approach will perforce narrow the spreads between price and value"

Like I said I'm glad you don't do it.

"I can only tell you that the secret has been out for 50 years, ever since Ben Graham and Dave Dodd wrote Security Analysis, yet I have seen no trend towards value investing in the 35 years that I have practiced it. There seems some perverse human characteristic that likes to make easy things difficult"

To me it is like Womens magazines having different weight loss secrets and diets every week.

To me it is absurd that they don't just write "Eat and drink healthy, eat less, and exercise alot" and then the subject is closed.

They could then say "eat fruit and vegetables, drink water, and run/walk alot, play a sport if you can" if they really wanted to go into detail.

I mean there is no other secret to weightloss for christ sakes - people just make it hard for themselves.

People like to make easy things difficult. People will not accept that weightloss is that easy, and they will not accept investing is as easy as buying shares in a great company and mostly forgetting about them. If they want to make more pay less initially, wait for a sale.

I have no doubt that anyone who just bought some Woolworths, Fosters, Westfield and BHP shares today and reinvested the dividends and forgot about them for 30 years would end up richer than most, if not all of you on this board.

Your tax is nothing, brokerage nothing, stress nothing, effort and time involved nothing, Price slippage on trades nothing. You don't actually have to do anything. But I have no doubt that none on you will do this.

(speel over, apologies to all concerned )

 

[Realist]

Re: Which one do you use? Technical or fundamental analysis

Bunyip,


How much tax going to have to pay this year for capital gains this financial year?
(just a percentage of total capital - I don't want to get too personal)

Say you have $100,000 invested and your tax will be $7000 - just say 7%.

Tax worries me..

 

[Realist]

Re: Which one do you use? Technical or fundamental analysis

But, you don’t have to be contrarian, with some preparation you can hop on a bandwagon after they are off.

Guppy’s idea not mine, but it makes sense.

You can indeed, but when do you sell?

 

[MichaelD]

Re: Which one do you use? Technical or fundamental analysis

You could have easily outperformed the All Ords if you'd only bought stocks that were outperforming the All Ords, and you'd hung on to them only as long as they continued outperforming. And every time one of your stocks stopped outperforming, if you'd dumped it and replaced it with another outperformer. No fundamental analysis, no assessment of fair value, none of that other time consuming stuff that so many stockmarket players waste their time on.....just buy strongly uptrending stocks that are well and truly outperforming the market average ."

There is just so much wisdom in Frank's advice, yet so few investors follow it.
Perhaps the reason they don't follow it is that they tell themselves "Everyone would be doing it if it was that easy".

I hate to be a naysayer, but this methodology, despite its allure and seeming simplicity, is demonstrably untrue by (my own extensive) backtesting. Picking the outperformers for a given recent period is less profitable than random selection, and the more the stock outperforms the index, the less profitable the methodology becomes.

 

[bunyip]

Re: Which one do you use? Technical or fundamental analysis

Realist

Nice buy on the jeans. One of the differences between a pair of jeans and a stock is that no matter what happens to the price of jeans after you buy them, it's not going to affect you one way or another.
Different story with stocks. A bad decision such as buying at the wrong time could end up being very costly indeed.
Many investors who buy a stock because it's 'on sale' are dismayed to find that it's even more 'on sale' a few months later when it's dropped another 30 or 40%
A better approach is to buy a stock you like after it's bottomed out and has recently begun a new uptrend. That way you're still buying it at a cheap price, perhaps cheaper in fact than if you'd bought it while it was falling. Furthermore, there's every chance your investment will start performing well for you almost immediately, rather then you having to possibly wait ages for it to turn around and start performing well, if you'd bought it while it was falling.

Indicentally my friend....I'm not trying to convert you to my way of thinking, I'm just expressing my views because that's what this forum is all about....interchange of ideas.
Whether or not you do things my way is of no interest to me. I just like helping people, and I've had many investors come to me over the years and tell me that they turned their trading results around after implementing my approach. I always find this very rewarding, which is why I continue trying to help people.
Who knows, even you might one day tell me that you've boosted your returns by incorporating some of my ideas into your own trading.
But if you don't want to go down that road...not a problem. As you said yourself, it's a good thing that we don't all attempt to do things the same way.

Bunyip

 

[BSD]

Re: Which one do you use? Technical or fundamental analysis

You could have easily outperformed the All Ords if you'd only bought stocks that were outperforming the All Ords, and you'd hung on to them only as long as they continued outperforming.

And every time one of your stocks stopped outperforming, if you'd dumped it and replaced it with another outperformer.

No fundamental analysis, no assessment of fair value, none of that other time consuming stuff that so many stockmarket players waste their time on.....just buy strongly uptrending stocks that are well and truly outperforming the market average

Bunyip

Ho Ho, I hope nobody paid for that 'advice'.

I will put my 2 cents into this discussion later, but Icouldnt help but laugh reading this.

 

[bunyip]

Re: Which one do you use? Technical or fundamental analysis

I hate to be a naysayer, but this methodology, despite its allure and seeming simplicity, is demonstrably untrue by (my own extensive) backtesting. Picking the outperformers for a given recent period is less profitable than random selection, and the more the stock outperforms the index, the less profitable the methodology becomes.

With all due respect Michael, what you're saying is wrong.
I'm not interested in the results of backtesting. I've traded this strategy with real money for years, so have my students, and we've consistently outperformed the market. And not just by a little bit either, I mean we've well and truly outperformed it.

Forget about backtesting, put some real money on the line and see how you go. It is simply not possible to underperfom the market if you buy only stocks that are outperforming the market, and sticking with them only as long as they continue outperforming the market.
Random selection over the long term will not outperform the market average, over the long term your stocks, when their performance is averaged, will only be of similar performance to the market average.

Bunyip

 

[Julia]

Re: Which one do you use? Technical or fundamental analysis

Ho Ho, I hope nobody paid for that 'advice'.

I will put my 2 cents into this discussion later, but Icouldnt help but laugh reading this.

BSD

Holding my breath here, waiting for the 2 cents worth!
Why the delay??

Julia

 

[cuttlefish]

Re: Which one do you use? Technical or fundamental analysis

There is a compilation of Buffets letters to shareholders in the Berkshire Hathaway annual reports over the years:

http://beginnersinvest.about.com/cs/warrenbuffett/a/aawarrenletters.htm


I read them all in detail about 6 years ago, and my memory is that buying and turning around underperforming companies is not part of his strategy. Buying and holding undervalued but good companies, with good management, and retaining that management to manage the business as they always have, seems to be more aligned with his strategy. A quick skim through a few of the letters just now seems to confirm that opinion.

I'd be curious to hear examples the opposite scenario of where he's gone the opposite way and bought companies then turned them around. (apart from his original textile company purchase).