WALL STREET SMARTS, THE BLOG, IS NOW WALL STREET SMARTS, THE BOOK. FULLY EDITED AND REVISED WITH NEW MATERIAL ON AMAZON
We have now completed our studies of fundamental and technical analysis. The practitioners of each form of investing mock and belittle the other. Random walkers, like Professor Malkiel, criticize both of them for various perceived shortcomings. Bradbury K. Thurlow in his work, Rediscovering the Wheel, Contrary Thinking & Investment Strategy, did a very good job of laying out the differences between these three investment philosophies as follows:
A majority of both professional security analysts and individual investors would support the thesis that careful fundamental analysis (i.e. of a company's earnings record and outlook) is prerequisite to any responsible investment decision.
The antithesis, believed by technical analysts for many years, is that the price of a stock at any given moment discounts all known relevant information and that first-hand knowledge of same is redundant in the decision making process.
According to academic Efficient Market Theory (more respectable that Granville's thought, but related to it) pertinent knowledge is discounted in the price structure before anyone can legally profit from it.*
It may be presumptuous on my part, given my lack of expertise when compared to these eminent financial writers, but I would suggest that fundamental and technical analysis may each have a place in an investor's arsenal. An investor's personality will, undoubtedly, tend to bias his or her choice toward one or the other of the two strategies. A person with a deliberate bent for accounting factors might not be attracted to the "quick draw" nature of short term, technical trading moves. Conversely, a person looking for quick "in and out" trading in the market will find a long-term fundamental approach utterly dull and smothering. So, to a certain extent, an individual's personality will probably lead him or her to either fundamental or technical ways of investing.
Notwithstanding the psychological attractions of each form of investing, all investors in the market share a common goal: making a profit. The follow-on to that common goal could be, however, the time it takes to book the profit. Viewed from this perspective, the issue of which form of investment strategy is better might be recast as an exploration of an investor's goals and time horizons for the money available at the time. If a 30 year old, busy furthering his or her career, is investing for retirement and has little time or inclination to devote to the task, then a fundamental "buy it for keeps" approach may make the most sense. Finding a small portfolio of companies which meet all of his or her requirements for value investments may be all that is needed at this point in the person's professional/investing life. That may change in the future, but for now such a strategy fits the bill.
At some other point in time and with funds to be devoted to a different investment goal, the same person, seeking a profit in a number of days, weeks or months as opposed retirement funds needed several years hence, may find a short term technical strategy attractive. Please note the qualifier in that last sentence, "with funds to be devoted to a different investment goal." The money put into long-term, fundamental value investments for retirement is not disturbed. Different investment funds, which the person can afford to lose without suffering lasting financial damage, could be devoted to short term, technical trades.
Yes, it may be possible to have it both ways. The danger lies in the fact that it is difficult enough to master one, much less, two strategies. The level of difficulty increases, probably logarithmically, in attempting to learn a second set of rules and strategies. More to the point, funds initially invested with a long term goal should be left untouched and not be converted and used for short term trading gains. With that caveat in mind, an individual is free to step up and take a shot.
* Excerpt from Rediscovering the Wheel: Contrary Thinking & Investment Strategy by Bradbury K. Thurlow, Fraser Publishing Company, copyright 1981, page103
Comments are always welcome.
No comments:
Post a Comment