Is Financial Or Technical Analysis More Useful To Investors?

Fundamental and Technical analysis are vastly different methods for analyzing the value of an asset. One works, and the other one might as well be a sixteen-century experimentation. 

The problem with pure Technical Analysis is that it is based on nothing but past data, with no regards to the underlying asset being analyzed. 

On the other hand, a firm’s Fundamental Analysis looks at the economic and financial aspects affecting its business. Inclusive of both systematic and unsystematic risks.

Fundamental analysis includes looking at the balance sheet, statement of cash flows, income statement. They determine any detail of importance in their 10-k reports. Whether the Board is independent enough, or the competency of its managers and by extension—leadership.

You may further do some arithmetic by doing some ratio analysis. Then, you can forecast cash flows by utilizing discount rates or opportunity costs against future investments.

Also, important aspects of making well-informed decisions are intuition in where the market/society are headed? What are social media trends? What products are popular? 

In Technical Analysis there are—Contrary-Opinion Rules Analysis, Candlestick Charts, Bar Charts, Support & Resistance Levels, 200-day & 50-day moving averages, etc. There are more types of data sets to analyze which would be enough to fill this post.

As I talk about data, it is only apropos I put my technical training to use. 

So let us look at a quick example of a financial technical analysis method.

Quick search of Walmart—

We will glance at 50 & 200-day moving averages. 

-The Red line is 200 days.

-Blue line is 50 days.

-The dynamic line is WMT stock price.

If the 50-day MA price from the top crosses the 200-day MA, it is referred as a “death cross.” So, you SELL.  

If the 50-day MA price crosses the 200-day MA price from the bottom, it is referred as a “golden cross” and you BUY.

If your intro price was $130 in the last 6 months, you would have sold at Walmart at ~$136 and repurchased it back at ~$140.50. 

  • Current price $147.46
  • You would have earned ~$6/share ($136 – $130). 
  • You would forgo the earnings BETWEEN ~$136 & $140.50.
  • Then you would have earned only ~$6.96 ($147.46 -$140.50).
  • $147.50 – $130 = $17.46 Passive Holding. 
  • $6.96 + $6.00 = $12.96 Actively Trading.
  • That’s $17.46 vs $12.96 or 13.43% vs 10% on the initial $130/share.
  • You would also have incurred trading fees and if you consider your time valuable, your TIME!

For further perspective you can look here.

Over longer periods of time, the changes often become more pronounced. 

Furthermore, certain individuals or Tik Tok/YouTube gurus, will pinpoint a chart and say—look at this pattern it looks like a T-rex. T-rex bad—sell.

The point is shapes and patterns become self-fulfilling prophecies, that of which you see what you want to see. We are living in a braggadocious instant fame cycle. You seldom hear of losing strategies. 

When people make a following out of slinging chart trends, it hurts my soul. The feeling is akin to how lawyers feel when the expert opinions of “arm-chair” litigators are referenced. 

You will see a video, or a clip preceded or succeeded with “not financial advice” because someone “figured out” the secret to spilling nonsense w/o facing consequences, however, seconds ago, these literal words were uttered in verbatim “I would pull my hair out if you don’t buy this investment” by said author.

Doing simple fundamental analysis is time consuming and it could be quite boring. Looking at charts and drawing shapes can be alluring, requires no training, may be learned in just a few repetitive cycles. There’s nothing wrong with educating yourself (I did), but these are the people monetizing get rich quick schemes, then they sell you online courses.

When forecasting in finance, technical doesn’t mean good, that’s for other sciences. You may use some technical aspects as a tiebreaker or a down the line supporting item.

My best advice is—invest passively, wisely, and passionately. Average buy, have patience, and do not buy what you do not understand.

This goes for bonds, equities, crypto-assets, real estate, etc. If you believe in the future of a technology, a trend, average buy it. When you feel comfortable with your gain, and no longer see potential on an investment and/or positive impact on the underlying business, you sell (not on the particular movements of the asset price). As simple as that.

This definitely works. Warren Buffet didn’t go all in the DOTCOM boom/crash when everyone flocked to it in the late 90s and it was because he did not understand it. He is a very smart guy; within his organization and the finance world he is well regarded. He didn’t invent much if anything, other than perhaps a one-man example of patience and compounding investing. 

During the great recession, Buffett was the one guy who helped Goldman Sachs out of a jam, profiting quite handsomely.

Just like in many aspects in life, our biggest enemies are ourselves. Stay patient, invest consistently, & buy the dips!

Sources:

Stockcharts.com

https://www.davidalancarter.com/trading-golden-cross-death-cross

https://markets.businessinsider.com/news/stocks/warren-buffett-berkshire-hathaway-goldman-sachs-sale-billions-return-bailout-2020-5

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