Posted by: stockscooter | April 14, 2012

Technical vs. Fundamental Analysis

Technical Analysis of the financial markets is basically the act of charting data and reading what it’s showing.  It’s somewhat of a short-cut to arriving at conclusions of market direction.  I say short-cut because fundamental analysts, like CFA’s spend years getting designations and sometimes weeks or months trying to deduce the direction of a market through their thorough number crunching.  CFA’s and other fundamental analysts seem to hate technical analysts-and it’s probably for good reason.   CFA’s spent years attaining their designations, chasing the worldly fare of knowledge, and seem to want to be held to an elite status.  Then technical analysts come along, in a big way, with the advent of the computer, and beat them to the punch and steal their steam.  Technical analysts chart the data that the CFA’s study.  If I were a CFA, I would feel like I was punched in the gut, too.  Who would want their hard work minimized by someone else with a short-cut? Believe me, it’s far from a short-cut.  It’s a discipline demanding of much hard work.  The very best technical analysts create new, cutting-edge types of analysis, which are more effective.  My proprietary models involve frequency modulation, which is the process of defragmentation of the price movements of a security. Simply put, it removes the “noise” of the market, and clearly reveals trend.   CFA’s often down-play technical analysis, in an effort to raise-up their own.  Those that do are behind the curve and in denial, as the investment management industry is embracing the strategic viewpoint that technical analysis offers.

An analogy I could use between the two disciplines would be the comparison between sword fighting and  fencing.  They are both trying to do the same thing…win the fight, but their equipment and strategy  are a little different.  The sword fighter (think of Conan the CFA) has great strength.  The fencer (think of Zoro the technical analyst) is more nimble.  They both can win fights.  However, in the game of investment management today, being quick with the strike is of the utmost importance (Remember David and Goliath?).  This is where the technical analyst excels. Also today, buy-and-hold is out of favor and so goes long-term fundamental analysis.  Moves are more intermediate in nature, so long-term and short term strategies have a hard time succeeding.

The best technical analysts are not just quick, but they can define trend and stay the course after entry, for optimal profitability.  Technical analysts can analyze individual stocks, sectors, inter-market relationships, etc. in just minutes. Therefore, technical analysts are like Zoro with their analysis, while CFA’s are more like accountants with a sword.  It can take a fundamental analyst weeks to analyze a company, and months to analyze an industry, sector or asset class.  Therefore, fundamental work should be more associated with secular market moves or at the least a long-term, buy and hold strategy.  There is great value in this approach, even though I may sound negative about CFA’s or fundamental analysts.  Their work under-girds the movements we as technical analysts are seeing and trading on the charts in lesser time frames, such as weeks or months.  Therefore, there is great synergy combining these talents and wonderful confirmation of trend that can result.  It’s too bad that more fundamental and technical analysts don’t get together and share their analysis to strengthen their decision-making process through synergistic efforts.

I am fortunate that I have fellow analysts to bounce ideas off, and as well, to look for confirmation or non-confirmation through their analysis.  Steve Mitchell is a fundamental analyst here in Fort Worth, Texas who I have called “friend” and fellow portfolio manager for almost two decades.  We have both developed our own styles to portfolio management, yet we are a blessing to each other and to our individual clients, because we don’t believe “It’s my way or the highway” in analysis.  We believe combining different talents, experience and skill sets creates an opportunity to achieve greater synergistic results. We as fiduciary portfolio managers put our client’s needs first, which means looking at all the alternatives before putting client money to work.  Reviewing investment ideas with different styles of analysis is a win, win situation.  I truly believe that if more portfolio managers and analysts would have an open mind and a humble heart,  and look for the similarities in their analysis instead of the differences, more good could ultimately be done for clients, the investment industry and humanity.

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