SIMON BROWN: Technicals versus fundamentals

There are many ways to look at markets; heck back in the day I knew somebody who used astrology to make investment and trading decisions. (No, it didn’t work). 

For the rest of us there are fundamentals and technicals. 

Fundamentals means looking at the data from results, creating ratios and ultimately putting together a valuation using a discounted cash flow model, or the like. This then tells you if the stock is cheap or overpriced by your methodology, which helps you decide whether you should buy or not. This approach is generally used by long-term investors. 

Technicals ignore the fundamentals and focus just on the price chart looking for trends, patterns, and resistance or support levels. This is then used to enter positions and is usually used by shorter-term traders. 

As a rule, the two sides never agree and each pours scorn on the other:  both say there is no basis for their use and both decry the accuracy of the other’s models.

The claim against fundamentals is that there are far too many unknowns to try to really get a grip on a valuation while those who hate technicals say it is pretty much just voodoo and not serious, at all. 

The truth is that neither side is perfect and there is another way to look at the differences. Fundamentals tell you what the company says about results, margins, growth prospects and so on. We trust these numbers, despite the (rare) cases where it’s a scam — think Tongaat and its sugar cane valuations or Steinhoff’s relentless profit rises.

Technicals tell you what the market thinks of that information the company has published by selling or buying. The price action (technicals) is always correct in the now, as people are putting money on the line. 

With this in mind I use both and would say there is a strong case for long-term fundamental investors to include some technicals and for the shorter-term traders to use some fundamentals. 

For example, I find a company where I like the fundamentals and think the valuation is attractive. I then use very simple technicals to give me an entry point. This would usually be a break higher, which gives me a higher conviction entry point. 

On the other side, a fund manager I know and respect spent millions buying a stock he loved that just kept falling. The valuation was compelling, but the market didn’t care. A quick amateur look at the chart would have told him what he already knew, the trend was down. Waiting a few months for that trend to reverse would have saved him a ton of pain and money. 

The bigger point is that investing or trading is actually all just about your opinion; having more information at your disposal would surely only improve your ability, and therefore your opinion and eventually your profitability. 

Still, in my view, you don’t need to be an expert on either and frankly I think both go far too deep. Simple works just fine.