Technicals vs. Fundamentals

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  • on March 19th, 2010

There’s probably nothing new for me to add, but I throw my hat in the ring anyway.  I’ve read fierce debates on the soundness(or lack thereof) of each style, but few seem to acknowledge where these styles meet.  I think they are both behaviorally driven, just in reverse of each other.

Think about it…as a trend follower, the largest gains are often at the tail(end) of the trend.  You’ve acknowledged that you’re not the first to enter, but to really land a big winner you’re hoping a crowd loses its senses and joins the trend at an extreme level so you can exit.

A value player?  You’re acknowledging that the crowd has already lost its senses, and hope a return to rationality will allow you to exit at a fair level.  The same mechanism, but in reverse…consider the following graphic:

*This is just my lame version splashed together in Excel.  If you want a more refined version, see this from Brian Shannon, or be sure to read his great book.

Smart people in both camps use everything from simple to complex methods to measure what they seek.  But the essence is that we all seek a difference between perception and reality, and that the gap between those will eventually fill and even overshoot.  Technicians measure reality in price charts, value players in balance sheets, growth players in income statements.

Over my career, I’ve migrated from fundamental analysis to price analysis because it’s a better fit for me.  I’m as skeptical of income statements as a fundamentalist is of price charts.  I can know every piece of data inside the price history, but can never know everything about the economics of a given company.  Sure, it’s data from the past…but how is fundamental data any different?

So if Warren Buffett, or Seth Klarman, or Marty Whitman, or Bruce Berkowitz says a stock is a great value, of course I will put it on my radar.  I have as much, if not more, respect for the disciplined approach to their craft as I do of any technician.  But I WILL NOT invest in a downtrending stock, pure and simple.  I believe there is plenty of time to act between the moment of maximum pessimism and maximum optimism, and I let others test their nerves at those points.

The point is, use both…but separate the mental real estate.  The screening process is much different than the entry and exit process, and trying to be jack of all trades leads to mastering none.  Focus on your craft, and the continuous improvement of it.  But if you hear Todd Sullivan make a compelling case as he did with GGP, does it really hurt to put it on your list?  It may take time before it rises to your action list, but if it does you now have value AND momentum on your side…a potent combination.

It’s up to each of us to determine where we can execute best on the curve.  The goal is to find that spot, understand the landscape of the participants, and use our own measures to track the changing dynamics.  Figure out whether you’re a “investors have lost their minds” person or a “investors are going to lose their minds” person, and you’re halfway there.

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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