Which one do you use? Technical or fundamental analysis?

[$20shoes]

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

Can i just say **** ME. That is an amazing example. I think you would find the problem these days is people are interested in what can happen in 2 days not 40 years. But man o man, what an investment.

I am not schooled in fundamentals. I wonder how easy/hard it is to pick up on something like that. I imagine it would take alot of research and following the companies in speculation on there progress.

It's a load of croc really. If you weren't involved in a company as a partner, and you invested $500 back then, which would have been a reasonable sum, and you managed to turn that in to $10,000 you would likely sell. If you could turn it into a 100K you'd almost certainly liquidate in a major bear market to lock in your profits. If you turned it into a million dollars and started to see your equity fluctuate by many tens of thousands of dollars you couldn't sleep at night. if you turned it into 100 mill and then watched your equity swing by tens of millions during corrections - well no human could tolerate that in reality: thats suicidal territory.

 

[bunyip]

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

Anyone who invested $500 (actually pounds in those days) in 1960, reinvested for 40 years, would by 2000 made $109m. That's 36% compounded annual return.

Yeh, 36% compounded return is a good performance for a large company.
Considerably better than Buffet gets.

But realistically, similar returns or better are available year in year out to trend traders who know what they're doing - even in bear markets.....IF they're willing to go short as well as long.

 

[bunyip]

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

Well done Bunyip Very well done

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

Do you cover one eye when you drive your car?
Do you use only one pedal when riding a bike?

Why not use all the tools at your disposal?

Technical analysis is a good way to find new stocks/ companies that you may not have been aware of & get in ahead of the crowd.
Finding new companies with good Fundamentals often means reading a report ie- the sheep are already aware of it.

TA is good for making entries & exits ie making a buck shorter term
FA is the retirement accumulation way of patiently building a nest egg.

Different strokes for different folks.

Personally I am much more dependant on TA because I don't have a steady income stream for investing long term but I never buy a share without checking the basic fundamentals.

I find no fault with 'checking the basic fundamentals' as a way of substantiating the technical view.

But bear in mind that technical analysis in its purest form is, in effect, a method of fundamental analysis anyway.
TA has been bastardised to some extent in recent years with the invention of hundreds of so called 'technical indicators' that put squiggly lines on your chart, but which provide limited value in my onion.
Pure TA examines price action rather than indicators, and more specifically, the trend or direction of price action. The trend of price action is determined by what thousands of people think of a particular stock or market. And what they think of a stock is largely based on what they know about the fundamentals of that stock.

If a blue chip stock is rising solidly in a clear uptrend, the most obvious reason is that it's coming under heavy buying pressure because thousands of people believe it has good fundamentals.
If a blue chip is being sold off and pushed downhill, chances are that thousands of investors have uncovered negative fundamentals for that stock.
Hence, by studying trends of blue chips stocks, we can get a pretty fair idea of the fundamentals.

We can take this a step further by using the 'top down' approach that looks firstly at the trend of the overall market, then examines the trend of the main market sectors, then finds the strongest trending stocks within the strongest trending sectors.
This gives us a short list of the outperforming stocks - the ones most likely to provide us with decent gains. Most of these stocks will have strong fundamentals, and we didn't have to spend one single minute of our time doing fundamental research to find them.
All we needed was software with the ability to do 'relative comparison' scans.

A man called Nick Darvas decided to try his hand at trading stocks back in the 1950's. After a somewhat shaky start, he made 2 million dollars over the next several years - equivalent to perhaps 60 to 80 million dollars in todays values.
He outlined his method in his book 'How I Made Two Million Dollars In The Stockmarket'.

Darvas first traded from tips - it seemed that just about everyone knew a good stock to buy. Darvas bought all of them.....and quickly found out that trading from tips was a fast road to the poor house.
Next he decided that company research must be the road to profits. He conducted exhaustive fundamental research to help him decide which stocks to buy.
To his surprise and dismay, he once again lost money.
His next idea was to trade from broker recommendations - he figured that as professionals in the game, brokers would have access to far better research and information than he had, and would be able to recommend stocks that were likely to perform well.
Same result - Darvas lost more money.

By this time he was just about at his wits end - he'd done nothing but lose money after 18 months of trying everything he could think of to extract profits from the market.
One day he was trolling through the stock quote pages, wondering how he'd ever make money out of the game, when he noticed a stock that had been moving solidly upward on heavy volume for the last few weeks.
He'd never heard of the stock, but he figured that if lots of people were buying it and pushing the price up, there must be something bullish about the fundamentals.
He took a punt and bought it, and made an impressive profit.
At first he could scarcely believe that making money could be as simple as buying a stock that was in favour. He repeated his experiment with another stock, and another and another, each time buying purely on price action and volume. No fundamental analysis of his own - he simply looked at the trend of the stock to get a summary of what people thought of its fundamentals.
He was employing 'relative strength comparison' in its simplest form....finding outperformers by comparing the strength of individual stocks relative to the strength of the overall market.
He simply bought into these outperforming stocks, and hitched a ride on the trend until they stopped performing. His results were spectacular.

I used a similar strategy in my stock trading days, with just a few refinements such as sector analysis. I can't claim to have made 80 million dollars but I achieved results that were not to be sneezed at. It definitely works.
Now I use basically the same approach to trade Forex....find a currency pair in the early stages of a solid new trend either up or down, jump on and hitch a ride until the trend runs out of steam.

 

[Wysiwyg]

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

The tricky one is the up-trending share price with terrible company fundamentals.

 

[bunyip]

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

Hey Bunyip great arguments.....makes a lot of sense and I totally agree with your way of thinking about being stuck in dogs whil you could have the money working.....

It was challenged that WDC is a dog and it clearly is not.......Its a fantastic stock in a rut, currently massively oversold.....but oversold on a short term good reason....

Love your poetry......you have too much time...

Condog

You're commenting on WDC the company, whereas most of us are commenting on WDC the stock.
No matter how rosy the fundamentals of a company, we only make money (apart from dividends) if its good fundamentals translate into significant movement in its stock price.
I think it's foolishness to hold a stock for a prolonged period of flat or falling prices, when there are dozens (probably hundreds) of good, well managed companies out there from which it's possible to make good money.

WDC has been a dog for at least five years in terms of stock price movement, irrespective of how great the stock may stack up from a fundamental perspective.
The company itself may not be a dog, but the stock itself certainly is.
Astute market players don't make their money work part time, they keep it working all the time - and the market provides plenty of opportunities for doing so.

I'd rather own a racehorse
That's powering down the straight
Than half a dozen mangy dogs
All whining at the gate!

 

[bunyip]

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

The tricky one is the up-trending share price with terrible company fundamentals.

I think that's more common in smaller stocks whose prices are prone to being moved by rumour, rather than by solid fundamentals.

 

[metal_loz]

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

Hi everyone,

I just did a course at uni which solely focused on fundamental analysis to value stocks. I have been searching for historical data so I can compute a market return. The S&P website only has total returns for the past 5 years. If I were to calculate the geometric return for the past 10 to 25 years it yields a result lower than the risk free rate.


What market return do you use in your models when you are calculating cost of equity?

I know you can't rely on these models, I just want to apply the knowledge I have learnt.

Thanks for anyone who answers my newbie question

 

[skyQuake]

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

Hi everyone,

I just did a course at uni which solely focused on fundamental analysis to value stocks. I have been searching for historical data so I can compute a market return. The S&P website only has total returns for the past 5 years. If I were to calculate the geometric return for the past 10 to 25 years it yields a result lower than the risk free rate.


What market return do you use in your models when you are calculating cost of equity?

I know you can't rely on these models, I just want to apply the knowledge I have learnt.

Thanks for anyone who answers my newbie question

Good luck! Doubt you'll find much applicable knowledge from 60year old professors, teaching 80 year old theories.

Finance.yahoo.com has longer term stuff eg. ^AXJO is our index, historical goes back quite far.

 

[AlterEgo]

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

I think that's more common in smaller stocks whose prices are prone to being moved by rumour, rather than by solid fundamentals.

Or it could be moving based on inside information, which is also fundamental information, but fundamental information that you're not aware of. Just because you're not aware on any positive fundamental information, doesn't mean there isn't any. It may just not be widely known, or you may not have looked hard enough to find it.

Basing investment or trading decisions purely on fundamental information is, in my opinion, fundamentally flawed, because you're relying on the publicly available information on being complete, correct and accurate. And that's not an assumption that I think can be assumed.

Why put all that time and effort into analysing company balance sheets (which may be based on some "creative accounting"), etc, when a glance at a chart tells you all you need to know? If a stock is rising on high volume, there is obviously a reason for that move. Whether you know what that reason is or not makes no difference, you can still profit from it.

I love this quote from Nicolas Darvas:

"My only sound reason for buying a stock is that it is rising in price. If that is happening, no other reason is required. If that is not happening, no other reason is worth considering."

 

[motorway]

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

How Do You Know When A Stock Gets To Be Too Cheap?


Motorway

 

[metal_loz]

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

Good luck! Doubt you'll find much applicable knowledge from 60year old professors, teaching 80 year old theories.

Finance.yahoo.com has longer term stuff eg. ^AXJO is our index, historical goes back quite far.

Yeh I know about yahoo finance. I calculate the price return to be around 4.7%. How can I even use this as an input into capm when it's lower than the risk free rate? The cost of equity figure will be incredibly low and lead to everything coming up undervalued.

I plan on studying/reading as much material on investing before I start. I just want to know what market risk premium to use.

 

[bunyip]

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

How Do You Know When A Stock Gets To Be Too Cheap?


Motorway

Thank you Motorway.....what an absolutely excellent article.

A good example of the pitfalls of the bargain hunting mentality was given to me by a bloke who sat beside me at an Options information evening in Brisbane some years ago.
He told me he made numerous purchases of Pasminco while its share price was heading south. He lost his entire investment - in excess of 100 grand - when the company went broke.

I asked him why he kept buying a falling stock.
His reply was...
"For quite some time after the share price started going down, various brokers were still singing the praises of the company, saying it was fundamentally sound and represented excellent buying at current values. Even Rene Rivkin was recommending it in his newsletter.
I thought I was getting a bargain. I bought more as it kept falling because I thought I was getting an even better bargain".

 

[alphaman]

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

I plan on studying/reading as much material on investing before I start. I just want to know what market risk premium to use.

Based on the research estimates I've seen, market risk premium for US equity ranges from 4.5% to 5.5%, which looks reasonable to me in a low interest rate environment.

But you might want to think again about using CAPM for investing.

 

[skc]

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

It's a load of croc really. If you weren't involved in a company as a partner, and you invested $500 back then, which would have been a reasonable sum, and you managed to turn that in to $10,000 you would likely sell. If you could turn it into a 100K you'd almost certainly liquidate in a major bear market to lock in your profits. If you turned it into a million dollars and started to see your equity fluctuate by many tens of thousands of dollars you couldn't sleep at night. if you turned it into 100 mill and then watched your equity swing by tens of millions during corrections - well no human could tolerate that in reality: thats suicidal territory.

If you are thinking in the perspective of a short term technical traders, then you will never hold on to a stock for 40 years.

If you are a fundamentalist however, then you should be forward looking, not looking back at how much you've paid or how much you've made. If the company has significant growth prospects then you hold on to your shares.

And, if your holding is in fact in the millions, then why would you care about day to day fluctuations of a few $Ks? No body says that it will be easy, but just because you can't easily do it doesn't mean it isn't doable...

Yeh, 36% compounded return is a good performance for a large company.
Considerably better than Buffet gets.

But realistically, similar returns or better are available year in year out to trend traders who know what they're doing - even in bear markets.....IF they're willing to go short as well as long.

A significant difference is tax... trader making 36% return will soon be paying tax at the highest marginal rate, so he will soon be compounding at 18% instead of 36%.

 

[$20shoes]

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

If you are thinking in the perspective of a short term technical traders, then you will never hold on to a stock for 40 years.

If you are a fundamentalist however, then you should be forward looking, not looking back at how much you've paid or how much you've made. If the company has significant growth prospects then you hold on to your shares.

And, if your holding is in fact in the millions, then why would you care about day to day fluctuations of a few $Ks? No body says that it will be easy, but just because you can't easily do it doesn't mean it isn't doable...

I'm not so sure that a fundamentalist could hold on for much more than a multibagger. In fact, I know that the pressure to take money off the table would be be too overwhelming for 99% of fundamentalists out there. In fact, I know a lot of fundamentalists who get shaken out of their positions readily as market sentiment shifts.

If I were overexposed in one stock, that was worth millions and the GFC was just starting to kick in, my equity wouldn't just be rippling...you'd typically be talking swings in a bear market of hundreds of thousands....why would you hold through that??...not many could hold through the mind play that would ensue. Human psychology would not let you.. you'd either be smart and sell at the top or finally break and sell at the bottom or at least attempt to average down to compensate.

Even being exposed to one security with millions at play would not even be remotely feasible for 99.9% of investors. The fear of losing it would be too great and your health and lifestyle would be adversely affected by the precarious position you'd believe your wealth is in.


Would love to hear from investors who have been overexposed in one stock, and how they dealt or didn't deal with it - particularly form a human psych point of view. I'm sure there are some who can take the exposure, but I'd say you're a rare breed.

 

[Wysiwyg]

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

An alternative would be with a free carried parcel of shares. Knowing you have nothing to lose and everything to gain from holding through thick and thin.
A 10 bagger would be hard to ignore though.

Nahh. Take the money and run.

 

[Julia]

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

Even being exposed to one security with millions at play would not even be remotely feasible for 99.9% of investors. The fear of losing it would be too great and your health and lifestyle would be adversely affected by the precarious position you'd believe your wealth is in.

Agree, $20shoes.
With the probable exception of someone who has inherited stock, understood nothing about the market, had no interest, and eventually found themselves with a considerable profit.

 

[rbbrain]

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

Hi all
(selected good comments over the last 3 years above)

I combine both fundamental and technical analysis, at first I choose some stocks with fundamental analysis then with technical analysis decide when trade them.

Any true Fundamental investor can not use Technical analysis...

I think I'd have to disagree with you realist, maybe they wouldn't use it to trade per se but i think it is useful to identify companies that might be undervalued for analysis

If you are thinking in the perspective of a short term technical traders, then you will never hold on to a stock for 40 years.

It's a load of croc really. If you weren't involved in a company as a partner, and you invested $500 back then, which would have been a reasonable sum, and you managed to turn that in to $10,000 you would likely sell.

I have been posting under a different thread on a very similar topic, and just stumbled over this thread. The original question that Mostafa asked is a very good one.

For my take (using FundaTechnical Analysis), and the ensuing comments, please see this thread:
https://www.aussiestockforums.com/forums/showthread.php?t=18333

Cheers

 

[Value Hunter]

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

Interesting logic.
A charts price reflects the markets perception of its share price at that point in time.Regardless of wether you or 100 analysts value the share at even remotely the same core valuation.

Its not possible to even get 2 people agreeing on a valuation let alone 10,000 share holders,as can be seen by fluctuations in price.
If it was that easy to value a company then the share price would be stoic.

So here we go again whose perception of valuation is correct the fundamentalist or the technical analysts.

Fact remains that either has to see price rise above their BUY price REGARDLESS of analysis method or method of entry.

I disagree with that last statement. For a fundamental investor in many cases they can get a return from dividends, capital returns and takeovers.

 

[Value Hunter]

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

I'm not so sure that a fundamentalist could hold on for much more than a multibagger. In fact, I know that the pressure to take money off the table would be be too overwhelming for 99% of fundamentalists out there. In fact, I know a lot of fundamentalists who get shaken out of their positions readily as market sentiment shifts.

If I were overexposed in one stock, that was worth millions and the GFC was just starting to kick in, my equity wouldn't just be rippling...you'd typically be talking swings in a bear market of hundreds of thousands....why would you hold through that??...not many could hold through the mind play that would ensue. Human psychology would not let you.. you'd either be smart and sell at the top or finally break and sell at the bottom or at least attempt to average down to compensate.

Even being exposed to one security with millions at play would not even be remotely feasible for 99.9% of investors. The fear of losing it would be too great and your health and lifestyle would be adversely affected by the precarious position you'd believe your wealth is in.


Would love to hear from investors who have been overexposed in one stock, and how they dealt or didn't deal with it - particularly form a human psych point of view. I'm sure there are some who can take the exposure, but I'd say you're a rare breed.

I personally have one stock which represents around 25% of my total gross assets (my assets include shares, property and commodities and are leveraged). Not only do I own shares in the company, my parents (based on my recommendation) own shares both personally and in their super-fund.

The shares have done so well (we have all actually added to our share count over time by buying more shares) that between myself and my parents we have well over $1 million Australian dollars (I'm not going to give an exact figure) invested in the stock at current market value. Neither my parents nor myself are wealthy people (at least not by my standards) so for us that is a lot of money. We are happy to bank the increasing dividends and sit tight. I/we first purchased shares in the company in 2008 and are still holding and enjoying the ride. Like I said our sum total number of shares owned has gone up over time. As Peter Lynch pointed out you wanting to be cutting the weeds and watering the flowers, not the opposite. There have been weeks where the shares drop or rise by $50,000 or even $100,000 in a week (it tends to be a volatile stock). It doesn't really affect me much. What affects me are the fundamentals which have been consistently strong since I bought in.