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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