Tuesday, 15 February 2011

Fundamentalists Vs Chartists: Stick to your knitting

There are fierce debates on the efficacy of both technical and fundamental analysis. "Fundamentalists" snigger at "chartists" with comments such as "I have never seen a rich technical analyst in my life" or "How can one look at squiggles on charts to understand the valuation of a company". Chartists on the other hand say that fundamentalists have no idea of market movements and often change their BUY/SELL call too late (after the maximum damage is done in case of a fall in prices).

Let us take a quick look at what these two lines of analysis are. Fundamental analysis is looking at the company's published financial results, understanding its business model, competitive environment, economic headwind and tailwinds to ascertain a fair value for its publicly traded shares. This type is further sub-divided into two major categories - bottom-up and top-down analysts. Bottom-up analysts are those who look at the company's details and then decide on whether to invest or not. Top-down analysts, on the other hand, are those who start by analyzing  the economy, sectors supposed to perform well and from their drill down on good companies to invest in.

Extraordinary proponents of fundamental analysis are Warren Buffet, Peter Lynch, Walter Schloss, Phil Fisher, David Dremen and Seth Klarman among others.

Technical Analysis is when analysts look at the charts of price and volume of a stock of a security and try to establish a pattern. Their belief is that all news and views are already discounted in the stock price. So, just by studying price patterns (along with their volumes) effective predictions can be made of future prices. It is comparatively more difficult to find really famous and successful technical analysts. It is important to realize that all successful speculators are/were not technical analysts (this is a common misconception that many have - that all traders/speculators follow technical analysis, which is definitely not the case).

I am probably more of a "fundamentalist" than a chartist, but that is probably because of lack of expertise in the latter field. The issue is that both technical and fundamental analysis try to predict the future through varying means. And, at times, both will be wrong. It is very important to realize this and to learn one or the other (or both) forms of analysis. Use what works best for you. Whatever analysis you use, make sure its your own. That way you will have conviction and is the only way to make sustainable wealth in the markets.

Monday, 7 February 2011

"You Pay A Very High Price In The Stock Market For A Cheery Consensus" -- Warren Buffet

"Be Fearful When Others Are Greedy and Greedy When Others Are Fearful' -- Warren Buffet

"Buy when there's blood in the streets, even if the blood is your own." -- Baron Rothschild

Here are some reasons why I am more optimistic today than a few months back:

  • Everyone is either bearish or non-commital.  Practically no one is talking about the "India growth story" anymore
  • Mutual funds and ULIPS have very little cash inflows and very high cash levels in their portfolios
  • Bad news and results has impacted the sentiment negatively - be it Egypt or Inflation or Corruption, everyong is spreading the word of doom. Stocks of companies coming out with good results are getting sold to lock in profits and stocks of companies coming out with bad or mediocre results are getting sold to prevent losses.
  • IPOs are on the back burner once again as companies are not sure of investor interest
  • Food inflation is getting lower (prices of vegetables have gone down in the local markets) and we are likely to see inflation numbers come down  in the next 2-3 weeks
  • With the current situation the Central government is in, I think the budget will be a non-event in terms of policy making. I do not expect any big surprises in either direct or indirect taxes.
  • Egyptians are likely to sort out their problems or the world is likely to find something more interesting to move on to.
  • Indian markets are in a bear grip and stocks are getting cheaper by the day. Adding on corrections should be a prudent option for long term investors. What I am doing is adding at every 4-5% dip in price in my stocks. But do not rush in and exhaust all your cash now. Keep some away (I would suggest 50% of of your fresh cash surplus) to invest in case the Sensex decides to move further south from here.

Happy Investing!

Learning from Security Analysis - Part 1

I have started re-reading Security Analysis, 6th edition, (also will add on things from the 5th ed). I have been putting it on the backburn...