Calling all Technicians

[kakaballi]

Re: Calling all Technicians

@Southie

I am not sure one needs to be very exact in assessing the financial.value of a firm. Simple analysis based on balance sheet income statement and cash flow statement over last 10 years will enable anyone with a high school degree to do the necessary digging under the hood.

The technical analysis is something drummed up by wall street to increase buying and selling activity. To generate commissions.

And some mutual fund managers follow a combo of technical and fundamental analysis. Makes them look glamorous.

The great value investors such as Peter lynch Buffett Chris Davis and others did not or do not pay attention to technicals. Unless it provides them mismatch in pricing vs value

Okay, here’s the thing:

If you could make predictions using fundamentals alone, then thousands others would also be able to do it (like you said, anyone with a high school degree). Suppose you find that company A’s Balance Sheet/Cash Flow is great. Many others would reach the same conclusion and would like to buy its shares, pushing the price up instantly (demand/supply) and the new price would not be attractive anymore. This is given the market participants are all rational. Since markets are not rational all the time, there are still opportunities available to make money with fundamentals alone. This goes for medium to long term investments.

Technical analysis gives predictions for short term only. Even if the analysis takes into consideration long term data, but the ‘investment advice’ it generates if for day trading mostly. Again, given markets are not rational and behavior issues like herding bring in such opportunities.

You are right in a way that investment houses have an affinity for technical analysis but there’s a reason. Say, an individual investor uses technical analysis which gives prediction which has a 60% chance of being correct. So he might make money he might lose money. Now if a trading house does that with 100,000 trades every day, then statistically around 60,000 trades would make money and 40,000 would lose money, eventually giving some profit for the day. You cannot write-off technical analysis but it is not advisable for individual traders who trade infrequently.

Big successful investors make money going much beyond fundamentals. They actually KNOW people running the companies, they know the products, they know the potential and product markets. Buffett, for example, would gather much more information from non-financial newspapers than financial ones. A lot of his fortune comes from backing upstarts, most of us doing online trading do not have access to such information. Fundamentals alone would keep you away from making major losses but cannot guarantee a return.