This is mainly addressed to those who have tried both techniques, Fundamental analysis and Technical Analysis, but of course, everyone is free to comment.
Hi! I have read some articles as well as books on both techniques and their users and the following has been stuck to my head:
Technical analysis: (hard work)
Just read a couple of books to learn them.
Read charts(support and resistance, trends, fibonacci, japanese candlesticks and do risk management to lessen risk.
May get a return of 50% or more(sometimes even 100%) in less than a year.
Fundamental analysis: (more hard work)
Go to business school(some), read more than a couple of books, get CPA, CFA, CAIA, and etc…
Macroanalysis, due diligence, financial statement analysis, valuations, be excel expert and build financial models, and etc…
Return of usually 30% annually
-I would like to know why many people seem to support fundamental analysis to technical analysis.
So now I am wondering, why are there so much people into fundamental analysis? I would appreciate it if you guys can point out my misconceptions on both techniques.
^ Buffett isn’t really just market returns. Insurance float + activism (albeit quietly) isn’t something you can take advantage of. Anyone suggesting >10% average annual returns is highly suspect IMO.
^ Outliers and just for a limited time period. In any event, claiming that you should be able to hit the levels of Lynch even for a limited time is like claiming you’ll wake up and be Wayne Gretzky. In fact, being the worldest greatest hockey player is probably easier as the talent pool is smaller. Lynch is good, and I respect his views and accomplishments. But there is an element of luck that goes along with high levels of talent to create truly exceptional results. To claim that fundamental investing will likely return more than say 10% a year is just incorrect. Just like me claiming that I’ll dress for the Montreal Canadiens is also incorrect. Both are remotely possible, but extremely remote.
Obviously. No one gets the stock market all the time… it is uncertain and that’s why it isn’t for everyone. However, people, namely Buffett, Lynch, and Bolton, did get a return greater than 10%. Sure they didn’t get it all the time, but they did get a CAGR greater than 10%.
Just too be clear I didn’t say all the time. I said usually.
Buffets returns are similar to how a large conglomerate returns on capital are generated. Saying a return on equity is the same as equity appreciation in the market is definitely two different worlds.
There are a lot of corproations who ‘earn’ the same ROIC that Buffet does, and they’re not leveraging returns using an insurance float like Berkshire does.
that float though amirite. saw an article recently talking about driverless cars in 15 years being hte norm. implications basically is it would kill uber’s $40b valuation as well as all teh auto insurances. DAYUMMM, das 1 huge industry. but yea buffett also sells other types of insurances such as long dated puts i think the nominal value is about $30b or roughyl 10% of its enterprive value.
In the short term, equity prices are set by balances or imbalances in supply and demand for shares, as well as changes in perceptions of risk or risk premiums. Technical analysis is not necessarily a bad tool for getting at this essentially behavioral stuff, but it technical analysis covers a wide range of techniques, many of which were considered “technical” about 100 years ago (which is why modern computational and other “quantitative techniques” are generally considered a different investing style, even though they might seem “technical” in the everyday sense of the world, and may even involve using some classic techical indicators).
What this means is that technical analysis includes some stuff that seems plausible, such as MACD and resistance/support lines, along with stuff that seems kinda fantastical, such as astrological analysis. In the middle, there is stuff like fibbonacci levels, which seem dubious on the surface to me, but which could conceivably connect with how our brains are wired to shift between panic and greed (the idea being that fibbonacci numbers come up a lot in nature, so it’s possible that our brain pumps out extra dopamine and/or cortisol once certain fibbonacci-like thresholds are breached).
Over the long term, however, stock performance tends to follow the performance of the underlying company, it’s earnings growth, and the degree to which that growth is expected to continue into the future. Mispricings uncovered by fundamental analysis can take a very long time to correct, allowing prices to drift substantialy from their fundamentally-determined values.
Both techniques can work, but both also have to be combined with a plan for position sizing (how much of a position do you take in any one opportunity identified) and for money management (how long are you willing to wait for a trade or position to go against you before pulling the plug). Often times these decisions are as important or more important to long term performance than the individual technical indicator and/or valuation technique.
I’ve read about that, but not in detail. Screen for fundamentally sound stocks, buy and/or add shares of stock when there is a pullback or when near longterm support, and sell when it is no longer a good company. Did I get that right?