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Lately, many people have asked me this question: “Can I combine fundamental analysis with technical analysis?”
And this can be a very valid question especially if you just started out investing. Both schools of thought have their merits and critics at the same time, so which one works best?
Honestly, I am pretty much a ‘fundamentals’ guy. As much as I know of investors who do extremely well with technical analysis, I personally don’t use any of it. Call me a tough nut to crack!
You can also call me a ‘meat-and-potatoes’ kind of guy; I like sticking to the basics. I favor undervalued companies with strong fundamentals and great growth prospects, led by a management team I can trust. I enjoy studying how business owners build their companies and their economic moats, navigate an ever-changing business landscape, and employ various business strategies to emerge victorious (and profitable!). I believe that the fundamentals of a company drive the price of its stock in the long run.
Having said that, I also believe that my style of investing – value-growth – is not the only way to become a successful investor. There are many roads you can take to reach the promised land: income investing, value investing, growth investing, technical analysis, etc. A couple of investors whom I personally know invest in a style similar to mine — but with the addition of technical analysis. They still prefer to invest in a fundamentally sound company but use technical analysis to decide their entry and exit points.
You may ask why I don’t follow a similar strategy. The reason is I don’t think anyone can precisely predict how high or low a stock is going to go; it’s as good as anyone’s guess! In the short-term, the stock market can be highly volatile and this quote from Isaac Newton sums it up best:
“I can calculate the motion of heavenly bodies, but not the madness of people.”
Newton was specifically pointing out that short-term prices are affected by human emotion and sentiment (i.e. the madness of the people). When news is good, the market is optimistic and prices rise higher and higher, and the same is true vice versa. These short-term swings between optimism and pessimism offer technical analysts an opportunity to take advantage of this volatility. In that instance, then technical analysis has its use.
If I could, I’d like summarize this with an analogy.
“Playing” in the stock market is similar to playing a sport. With investing, the goal is financial freedom, and with sport, the goal is health and enjoyment. Many types of sports, however different, can all help you achieve that same goal.
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For example, golf is a leisurely sport known for its patience. A round of 18 holes can easily take four hours or more at the golf course. In golf, every single swing counts; a 200-yard drive is as important as a 10-foot putt. One bad shot into the bunker can mess up all your good work beforehand. You need a hell lot of patience.
On the other hand, basketball is a relatively shorter and faster game. It moves quickly from end to end and scoring is abundant. Even if you make a mistake, you can catch up on court (or your teammate has to cover you while giving you a good rollicking!).
Both also come with its own set of risks. Basketballers might suffer more knee and ankle injuries, while golfers have more shoulder and back injuries and, once in a blue moon, even get struck by lightning. Just like with different styles of investing, it’s important to know how to manage each set of risks properly.
In essence, golf and basketball are very different sports, but it doesn’t mean playing one means you can’t play the other. You are free to play both if you enjoy both the swing of a golf club or sinking a three-pointer from downtown. Just don’t mix the rules of one game with the other!
To sum up, the golden rule is to always understand what you are doing and use an approach that makes most sense to you. Whether it’s fundamental or technical analysis (or both), the more you learn and understand a technique better, the higher your probability of winning – just like sport.
Now who wants to have a round of golf with me? 🙂