I personally have never taken a side in this argument and have never fallen into that trap. I have attempted to understand both methods and I have used both methods for different reasons. But what are these two ways of analyzing investments?
Fundamental Analysis. This method focuses on the fundamental aspects of a company to determine it’s intrinsic value and then compares that value to its stock market value as determined by its stock price multiplied by its number of outstanding shares. It does this by looking at the company’s income statement, balance sheet and cash flow. This will include revenues, cost of revenues, operating expenses, non-recurring events, net income, assets vs liabilities, operating activities, effects of exchange rates, etc. You virtually need an accounting degree to understand all of those things. And then you have to compare all that to what a bunch of guys in NY have priced the stock to determine if it’s a worthy buy. And then do it all over again to determine if it’s a worthy sell. It’s a lot of work.
Technical Analysis. This method focuses on the technical aspects of the price of the stock and ignores all those fundamental aspects of the company. It analyzes the movement of just the stock price and tries to predict its future movement, either up or down. It does this by studying stock charts for repetitive and reproducible movements, both up and down. It then tries to determine if the stock has moved up too high or too fast and declares it to be overbought and therefore should be sold. Conversely if a stock has moved down too low and too fast it is declared oversold and needs to be bought. Technical analysis also looks at stock indicators like RSI, MACD, Stochastics, Moving Averages, Bollinger Bands, Channels, Pivot Points, Envelops, Clouds, Resistance Levels, Gaps, Candlesticks, Volume, etc., for additional insight into the future movement of the stock price. It can all be very confusing and intimidating. It’s amazing to me that a pure technical analyst doesn’t even need to know the name of the company or the business it’s in, he just needs to know the stock symbol in order to make the trade.
So here’s what I like to do. I use fundamental analysis when I first screen candidates to determine companies that have those quarterly and annual increases in sales, earnings and dividends that I like so much. By doing this I narrow down the number of candidate on which I need to do further research. Remember, there are approximately 15,000 stocks listed on the various exchanges and I can’t possibly look at all of these. I like to use as much help from as many sources as I can find like those I posted in an earlier post titled “Finding the Right Stock”.
Once I get a reasonably short list of candidates using fundamental analysis, I like to use all the capabilities of technical analysis with its use of charts and indicators to determine the specific timing of my buys and sells. I’ve learned over time that fundamental analysis is best for determining the types of companies and businesses to own but technical analysis is best for determining the specific timing of my buys and sells. And often timing here, as in many other things in life, is everything.