Post of the Day
August 26, 1998
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Subject: The value of each: techs & fundy's
I don't understand why there are camps, but they exist.
Some people are fundamental investors. They read financial statements and look at economic statistics and listen to managements about strategic plans and business models. This is the way they decide what to buy or sell. Estimating cash flows and future earnings based on all this information and using various and perhaps complicated discount models to arrive at a fair current price for shares or a bond or whatever.
Technicians tend to go straight to the source of interest - prices. They monitor the action using oscillators and bands and support and resistance and perhaps even sophisticated pattern recognition. They concede a powerlessness over information and just asume that if it matters it is in price and the way price is acting is all that they need to know.
|"They [technicians] concede a powerlessness over information and just asume that if it matters it is in price and the way price is acting is all that they need to know."|
Now, it is very clear to me that technical information is MUCH more timely than any brand of fundamental data you can use. Arguing against this is futile and should be avoided. We all know damned well that companies about to report dismal numbers well below expectations don't surprise EVERYONE, and that fairly frequently action in a stock or its options precedes the fundamental info and betrays (after the fact, unfortunately) where a stock is headed. Price moves FIRST, then fundamentals. This is almost a dictum.
So what do you do? The fundamental camp is most arrogant, I think, and by necessity. They work with the stalest information and they implicitly assume to be smarter than the market. They KNOW the correct price and are just waiting for the market to recognize THEIR correct price, which is inevitable and will surely result in great profits when it happens. they talk to the COO and CFO and play golf with the company's chief banker..................
And that CAN work, assuming you really are onto something ahead of the market. Hell, do I want NOT to have a mainline to Bill Gates or Michael Dell to get info on MSFT & DELL? Of course not. But sometimes even the biggest of big cheeses can mislead you, assuming you DO have access.
Technicians tend to be a little less pretentious, tend NOT to be Harvard MBA's or the other crusty types who run mutual funds. I don't see why an individual can't use both approaches in tandem, but it just seems that people stick with one or the other and really can't believe in both.
|"Don't scoff at either school. I gotta tell you, I get very suspicious about passion on either side."|
Myself, I put more stock in technicals, because you are playing off prices in the end. I can be RIGHT! that I'll get the S&P at or below book in my lifetime, but between now and then am I too stubbornly hold shorts and keep adding maintenance margins 'til Kingdom Come to get proven out? No. The technical picture can stay at odds with the fundamental one for a long time before things change. This is why you can't do one or the other.
I think that technicals foreshadow fundamentals. I think that our current market portends that the real economy over 6-12 months will post decent numbers. In 6 months or so we will see, I guess. But the markets can move so much faster than the fundamentals because of lags in data compilation that you just cannot wait for the FRB to confirm 6 months later what the market was shouting beforehand.
Don't scoff at either school. I gotta tell you, I get very suspicious about passion on either side. I don't think you can count on any approach to work too well all the time, so I guess it is best to treat the approach like you would a golf bag - You'd NEVER go out there with 1 club, so why do it in the markets? Sometimes you need to put away the driver and just hit 8 irons, and at that point you want to have one, so learn how MACD & Elliot & Bollinger Bands etc. work if you pride yourself as a fundamental investor and learn how to derive adjusted earnings and free cash flows and an appropriate dividend discount model if you are a technical investor, at least to know what the other guy is seeing.
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