Technical
analysis
It is important to realise that hundreds of fundamental analysts
will potentially have hundreds of different opinions about the precise
intrinsic value of a company - and they cannot all be right. Don't forget that price charts summarise the
underlying opinions and emotions of all the market participants.
Every chart tells a story, and it pays
to understand the stories in the price charts. One analysis method for determining the fair
value for a company's share
price is the study of the historical performance of the share price (which summarises the opinions of all market participants).
This is on the basis that share prices tend to factor in all known
information and news, and that the price moves in waves from over-sold
to over-bought positions as investors and traders buy and sell the
shares based on
their own belief of fair value. One underlying principle with technical
analysis is that "the
trend is your friend",
and therefore one investing strategy based on this belief is the trend
following approach - to buy shares in an up-trending share price, and
to sell when the trend weakens or has finished.
See more information about technical
analysis.
Fundamental
analysis options
There
are many different ways that fundamental
analysis can be performed, and
there are many different fundamental analysis criteria that can
be
considered. Some people spend hours and hours poring over company
financial information in order to arrive at something which they
believe is the intrinsic
value or fair
value
of the company's shares. Many people then make investment decisions
based on this analysis. A whole room full of analysts or economists
would potentially arrive at a range of answers.
From
the huge range of fundamental analysis criteria, Robert
Brain* utilises
three key measures to select quality companies for one of his low-risk
watchlists:
- ROE - Return on Equity - a performance
metric;
- D/E - Debt to Equity Ratio - a financial
risk metric; and
- PEG ratio - PE Growth ratio - an
anticipated forecast measure of growth.
For anyone who wants to limit the amount of time they spend on
performing fundamental analysis, these three measures might be
sufficient. For more details about how Robert uses these, and which
threshold values he uses and the method for selecting stocks, see the
detailed notes at right on Funda-technical
Analysis. |
Fundamental
or technical?
Which
analysis method should we use - fundamental or technical? Is one of them a waste of time? This
question often arises, and there is no single correct answer.
Some people utilise fundamental analysis
100%, and are somewhat successful, while other people utilise technical
analysis 100% and are somewhat successful. And there are
other people
who use a blend of both approaches and are all somewhat successful.
The
right answer for each of us could be whichever method, or blend of the
two, that we fell most comfortable
with, and whichever we enjoy doing. It could be argued that some of the
people who spend many hours undergoing their favourite analysis method
are wasting time, because a smaller amount of time would produce very
similar results. The important thing, though, is that they enjoy
spending their time on their chosen analysis method. See a more detailed discussion about balancing the time on research and investing.
Funda-technical
analysis
This
analysis method
is a clever blend of both fundamental analysis and technical analysis,
to optimise the benefits of fundamental analysis, and implement the
realities and usefulness of technical analysis. Some
people like to use fundamental analysis to eliminate the poor
performing, or poorly managed, companies and then use technical
analysis to time their entry and exit so as to maximise the chances of
favourable share price performance. See more details about Funda-technical
analysis.
And
whatever you
do,
beware of the sharks in the ocean!
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