Fundamental vs Technical Analysis

Fundamental vs Technical Analysis 

There are primarily 2 schools of thoughts when comes to investments, and they are:

1. Technical Analysis and
2. Fundamental Analysis

These two approaches are very different in nature.

Fundamental vs Technical Analysis Part 1: Fundamental Analysis

Fundamental analysis primarily refers to the use of financial information of a company, such as the Profit and Loss Statements and Income Statements. More often than not, it is the projection of the company’s performance that is important. It is therefore imperative for the fundamental analyst to correctly predict the future performance of a company, with the notion that the earnings per share of the company will subsequently be factored into the share price of the company after considering the typical price-earning-ratios in the industry that the company is in.

Some of the fundamental factors to consider are:
• The type of industry that the company is in – whether it is cyclical or stable, competitive landscape, monopolistic, etc.
• Diversification of the business – does the company have good diversifications into different businesses, geographical regions and wide customer bases?
• Financial health of the company – such as leverage ratio (gearing), debt to equity ratios, interest coverage and book value per share etc.
• Potentials of the company: Revenue and profit growth, net income growth etc.
• Efficiency of the company and/or management – such as income and revenue per employee, assets, receivable and inventory turnover etc.
• Business environment: Political, demographic, technology, environment.
• Other possible intangible factors include great leaderships and management team, integrity of management.

Some notable fundamental investors are: Benjamin Graham,Warren Buffett, Charles Munger, Philip Fisher and Peter Lynch
 

Fundamental vs Technical Analysis Part 2: Technical Analysis

The technicians believe that the history will repeat itself and reflected in the price of the underlying instruments. This notion is based on fact that human nature, and therefore market behavior remain the same since the beginning of time and patterns are hence repeatable. Many a time different indicators can point to different directions – the key here is to only take action (i.e. initiate position) when the weight of evidence prevails.

Technical analysis can be used for various different time frames, and are used by different traders to suit their temperaments. There is no one single great method (i.e. Holy Grail) as different strokes suit different folks. Also, the underlying investment instrument can behave rather differently from each other – for example, the technology stocks are highly volatile whereas a stabilized company in the F&B industry such as MacDonald has demonstrably less volatility.

Some notable technical traders are: Jesse Livermore, Nicholas Darvas, Ed Seykota.

Fundamental vs Technical Analysis Part 3: So, which is better?

Well, like in any crafts - there are always the Masters. If you are in the luckier group of people, perhaps you stumble upon either one of the method and it clicks, then that's great. For the others, perhaps there are some searching to do

Between the wide spectrum of pure fundamental investors to the pure technical traders, there are everything in between, with various shades of grey. Some where in the middle, there are investors/traders that combine both fundamental and technical analysis. One notable person here is William O'Neil, the founder of Investor's Business Daily who started the cup and handle pattern and the CANSLIM investment method.    

Fundamental vs Technical Analysis: Conclusion

In conclusion, there are many ways to skin the cat. To be successful in investment/trading, you may have to explore and define what suits you. The important thing here is your comfort level with the method (perhaps if it has large draw down and you could not sleep well, then perhaps that's not the method for you) as well as being in line with your personality and temperament. In short: Whatever works for you is the best method.

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