Technical analysis (TA) and fundamental analysis (FA) are the two main schools of thought when buying or selling shares. Technical analysis looks at the price movement of shares and uses it to predict its future price movements. Fundamental analysis looks at economic and company specific factors as you have learned.
Fundamental analysis used to be the only investment method but that has changed as the advent of high-speed computing has made technical analysis easier and more widely available. Many large investment firms are making their trading decisions based on computer algorithms.
As a student of finance and investment study, I used to think strongly, like many others do, that technical analysis is about as useful as voodoo for helping you figure out the best investments. I used to read the blog by Alex Lu, one of the most popular TA blogs. I found him very good as not only he is good in TA, he is also very well verse in FA. Once I commented about his use of TA in a stock selection, he replied me warmly.
“KC, ignore TA at your own peril”. I thanked him for that advice. I took it as a risk protection measure, and careful about a stock when goes down trending, rather than trying to win big searching for a big winner using TA. This is because I have my investment philosophy of:
“Taking care of the downside, and let the upside takes care of itself”.
I have also got a good e-friend, Ben Gan. He is actually from the same kampong as mine. No, I from kampong, he from the town. He is a good FA guy, and he uses TA too and he is very successful. Another TA guy is matrixcool in i3investor, I believe he did very well too. My friend CFTrader and I believe some of you also did well combining FA and TA, or even TA or FA alone. Of course not forgetting my friend, Ooi Teik Bee, not sure he still consider me as his friend as he said I have a small heart. You can see his excellent trading records in i3investor.
Most remisiers are using TA, I believe. Many of the largest market players are making their trading decisions based on computer algorithms, i.e. TA. TA could now be the major decision maker now.
So the same thing here, as you participate in my course, my advice to you is you may comment in a constructive manner, you may get “hantam” but the feedback will enlighten you. Don’t get upset with whatever comments by others, like just because someone tells you there may be something wrong with the stock you have. Sometimes the language used may be a liitle strong just to bring forward a point. And every one of us is human and sometimes unknowingly offends. You will learn more and it is good for you. You may avoid great loss in the future, maybe. So do not stick together like a cult, it is not good. Be independent in thinking. Confirmation bias is very dangerous in investing.
But one thing I must let you know, many of us don’t know enough to make strong criticisms that TA does not work, and never engage in any name calling, nor taking any sarcastic swipes. But we are human, sometimes this thing does happen. We just have to accept it with an open mind.
The comment below is a very good comment and almost sums up all I want to say about FA and TA.
[Posted by NOBY > Jun 6, 2015 10:46 PM | Report Abuse
It depends on the time horizon. FA alone can work but maybe not in the short term. Sound fundamental investing techniques will work out in the long term. We have so many examples of successful fund managers using FA methods. I have not heard about Seth Klarman, Joel Greeblatt or Warren Buffett looking at charts before they make their purchase.
Personally, when I first started embarking on investment, I tried learning TA and it just wasn't right for someone like me who can’t be staring at the screen all day to cut loss, buy on break -out, bullish divergence etc. Frankly speaking it was damn stressful.
And then I learnt the FA method and it just rang all the right bells in my head. It was simple to understand, intuitive and logical way of investing, looking at companies as business with intrinsic values attached to it. It was a method I could apply without having to spend too much time and too much stress.
I’m not saying that TA is not good, but it was just my personal experience. I know that my performance may not be as good as those who use TA or buy only up trending stocks, but at least I believe that in the long run, things will work out for me.]
I too have lost some money in 1993 and 1994 trying to use charts, that time we used hand drawn charts. I remember a few of them even after more than 20 years, Sriwani-w, Midf-w, etc which I have lost considerable amount of money. My friends who thought he was very good in that, after making a lot before that, also lost his underwear.
With that little experience and realizing that most remisiers, fund managers and investment bankers also using that with their huge resources and computer power, not forgetting the rich, syndicates and insiders are everywhere in Bursa, I stay away from there, and play my game in my playing field according to my rules. That is for me and I don’t ask you to do so.
And remember, life is not all about winning. It is also about humility and caring; caring for our next generation not like what happen in 1MDB with the huge debts. Caring such that you don’t get caught like many in 1998. If it happens to individual young person because of losing big in leverage in investing is even worse. It is hard for you to get up again. One can use margin if you wish to, it is your choice, but don’t convey the wrong message to the young generation. As far as this principle is concerned, I can’t compromise, and can’t sit still about it.
Sayonara FA?
The argument here is this statement.
"To be successful in stock market, FA alone will not work.”
This was posted in one of my threads. Sorry this is posted without malice, but just for discussion.
[Posted by Ooi Teik Bee > Jun 6, 2015 09:58 PM | Report Abuse
http://klse.i3investor.com/blogs/kianweiaritcles/68226.jsp
http://klse.i3investor.com/servlets/pfs/41947.jsp
Let the readers here be the judge, not your words or my words.]
The second link above is of course OTB’s challenge portfolio which returns 51% since the beginning of the year. See I agree TA works, I have never said TA never works. In fact many people wrote to me asking me to give stock picks and I referred them to OTB, knowing that OTB can help them, not me. I don’t give tips. I have no tips. I only teach fundamentals in investing. You learn and you decide yourself, not me. I do write about stocks though, but you can also see some of my recent stock picks don’t move, or even went down with the market.
What about the first link above? It was put up by Tan KW, isn’t it? See the “kianweiarticles”? Thanks Tan KW for putting up again, and also OTB for doing so. I am actually quite proud of my portfolio this six months as it did quite well, even for a short duration, which is not supposed to do so. Bear in mind, this portfolio was actually “collected” from “eliminations” of the stocks in my previous three portfolios published in i3investor, and not specially picked for any challenge. The reasons why I eliminated some of the stocks were all written in great details in the links in the link above merely for sharing the reasons why I sold some of the shares. Did I go into the challenge? Can a challenge in a 6-month of one year period show how great an investor is?
For a well-diversified portfolio of 24 stocks, it returned 17.81% against a loss of 0.7% of the broad market. They were 7 losses, or less than one third, with the biggest one for a company warrant of BIMB at 15%. Others are mainly single digit losses. There are a number of big gainers, Prestariang (81%), Latitude (72%, no I didn’t follow anybody as you can see in my thread on furniture companies, I wrote about it long time ago when its price was RM1ish), Tasco (47%), ECS (44%), Magni (29%), Perak Corp (24%), Willow (22%). Not bad, isn’t it. But more importantly, there are few losers and the loss is small. Again remember the principle of investing? Heads I win, Tails I don’t lose much. That is the essence of fundamental value investing.
Looking at it if I were to choose these few stocks to be in a challenged portfolio, my return will be close to the second portfolio. Sorry, just kidding, fundamental value investing care about diversifications, not 24 stocks, may be just 10 for small retail investors like me. And no matter how I choose, even retrospectively, I can’t get close to OTB’s portfolio return. His is amazing. But I am happy with mine.
So my course participants in my course, don’t abandon from my course, FA does work, even alone. I expect it to work in the long-term, it also works in the short-term, surprisingly. I know you find the last part in discount cash flow analysis tough, and may not suit your taste, but you have many other clubs in your bag to use. Of course you can enhance your outcome with TA, go ahead and learn from OTB, but my opinion is you should place FA first, then check with TA. Just my opinion.
FA Vs TA in a longer term
As a fundamental investor, I like to follow this principle below:
“Investing should be more like watching paint dry or watching grass grows. If you want excitement, take $800 and go to Las Vegas.” – Paul Samuelson
Sorry for hearing I saying this again and again as this is important, as this stressed the importance of a principle.
“People can't live with change if there's not a changeless core inside them.”
― Stephen R. Covey, The 7 Habits of Highly Effective People: Powerful Lessons in Personal Change
I have recently posted an article on the return of the longest portfolio in this thread:
http://klse.i3investor.com/servlets/forum/600078049.jsp
“Does fundamental value investing not work? kcchongnz”
There was another portfolio posted at the same time as a “challenge” for stock selection for first half of 2013. Just two of us, me and OTB. These were posted actually by Tan KW for fun and sharing purpose, and not so much as a challenge, but for sharing and fun. Remember, investing is for building wealth for the long term, not challenge with others how much each make? But just to counter this statement:
"To be successful in stock market, FA alone will not work.”
The link is appended as below and it uses TA:
http://klse.i3investor.com/servlets/pfs/12952.jsp
The return of stocks in the link has not adjusted for any corporate exercises and dividends, and so I did it like what I have done for my own portfolio using the adjusted prices from Yahoo Finance. I hope I did not make any major mistakes. The return of this portfolio is shown in Table 1 in Appendix below.
The portfolio returned 68.2%, very good for a period of two and a half years as compared to 12% of the broad market during the same period, in my standard. There are two losers, the same as mine; Benalec (-50.4%), and Alam (-25.3%). Not bad at all, as in investment it is full of uncertainties, and nobody can get 100% right all the time.
No one is perfect: Michael Jordan, the game’s greatest player of all time, shot just a bit over 80% from the line over his career. Chances are, you are not the Michael Jordan of the investing world.
It is not about who beating who, but this is about this statement:
"To be successful in stock market, FA alone will not work.”
Table 2 is the result of the portfolio of mine put up by Tan KW. So you can see fundamental investing did work too, if not better, and seems to be with less risk. But I can also tell you one thing. It could be lucky also because the market happened to be good during this period, and two and a half years is really short for a long-term investor. So it is best to have some humility, especially in investing.
Incidentally Tan KW put up our next portfolios again as on 1st August 2013. For these portfolios, I using FA and OTB using TA have written articles to explain in detail why we have chosen our stocks. I think for a number of stocks I have even carried discount cash flow analysis besides the use of Magic Formula in investing by Joel Greenblatt, and one or two on Graham net net. The analysis are all in the links below:
http://klse.i3investor.com/blogs/stock_pick_challenge_2013_2h/blidx.jsp
I was hoping I could get constructive criticisms to improve my analysis, for I belief there were many shortcomings in my analysis and assumptions. Again they are for sharing of knowledge, and not really for competition. I think I have mentioned there somewhere and both of us understood it well.
Table 3 and Table 4 tabulated the return of our portfolio after about two years now using the adjusted prices in Yahoo Finance. I hope I didn’t make any mistakes. Again you can see FA does work, and it works very well indeed. TA also works as well.
So with that I want to tell you that FA works, and it also works well even alone. Go and enhance your knowledge with TA. Remember the article I posted on “Buying bargains on the move”? How Pprofessor Josef Lakonishok enhanced the return of his funds by leaps and bounds by using some simple TA tools?
With that I hope you continue to spend some time and effort to learn about this fascinating FA. Don’t quit and continue to learn. In this world, nothing achieves without some effort.
Happy learning.
K C Chong
ckc14invest@gmail.com
(7th June 2015)
Table 1: OTB portfolio
Table 2: My portfolio
Table 3: My second portfolio
Table 4: OTB second portfolio
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