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Technical Analysis vs Fundamental Analysis

The difference between technical analysis vs fundamental analysis may not be clear to many Singaporeans especially to those who do not invest. In my earlier post, I had introduced both fundamental analysis and technical analysis. This post is mainly to highlight the key differences between the two investing approaches.

 

What’s Good About Fundamental Analysis Vs Technical Analysis

Pros of FA

Pros of TA

Pick value stocks by studying a list of key financial ratios such as net profit margins.

Value investors will know if a stock can be bought below its intrinsic value with a safety of margin. Often, investors will have their own shopping lists and waiting for a good entry point to buy or sell. A high price to buy does not mean the stock has a low value.

 

By using system tools and technical indicators to study the price movements 

Price information reveal how the market moves with consensus of the stock buyers and sellers. Often, investors can automate the trading by system settings, e.g. to set exit selling price and cut loss price. 

Get rich steadily over a period of time.

We have highlighted various value investing gurus such as Warren Buffett, Charlie Munger and Peter Lynch. These famous investors built their wealth over decades by holding value stocks. In Singapore, we have Seah Sean, the Asia Buffettologist. 

 

Get rich faster with an aim to get a higher risk reward ratio

TA investors use a risk/reward ratio to compare the expected returns of an investment with the amount of risk undertaken to capture these returns. The risk/reward ratio is often used as a measure when trading individual stocks. The optimal risk/reward ratio differs widely among various trading strategies. 

 

Good knowledge of the company

Value investors study the different aspects of a company e.g. historical records of financial statements,  annual reports, management competency, nature of business and industry.

Do not need to know the in-depth details of the company

Technical analysts focus a lot of their time in analysing system charting and uses technical indicators. They do not spend time reading quarterly annual reports and financial statements.

What’s Bad About Fundamental Analysis Vs Technical Analysis

Cons of FA

Cons of TA

Value investing requires patience

Valuation of a stock needs patience because they need to study the company in great details. Value investing play will also depend on the industry itself. Investors need to have a circle of competency about a particular industry to shorten their learning curve.

Trading results can be interpreted differently

Same charting result could be interpreted differently by different investors even through the system leverage.

Fundamental Analysis derived from the available information of a company and that can be biased or at times presented in a wrong way

Information of a company comes from the same company which can be in favour of the company. Figures can be bloated.

Chasing over a hot stock can be a deadly mistake

Chasing over a hot stock by many investors in a short time will result a sudden change of price movements. Their fear of losing out could be a start of a stock or market crash.

Knowing the track record of a company but without knowing current market momentum can be less effective.

Some undervalued companies can lie low for a period of time before it starts to gain momentum. When a strong momentum of the stock is ignored, the undervalue stock can become overvalue quickly and hence, opportunity may be missed.

Looking back history does not help to anticipate sudden market movements.

Stock reactions to negative or positive news can be seen in their historical charts but they cannot be used to predict sudden changes of price movements. Investors can suffer lost quickly in the next day when they wake up. At times, traders can see certain stocks either shoot up by more than 50% or plunge more than 50% in a single day.

 

CONCLUSION

Any form of investing will carry risks and it can be costly. You need to maintain the control of your own emotions toward investing.  Regardless of the investing approach, you need to know the pros and cons of each analysis before you embark on your investing journey. Both aim to reduce the risk of investments. For me, I tried both methods. My preference is to lean towards value investing rather than stock trading. We need to protect our downside and think deeper. Value stocks may carry intangible or tangible assets. If you own undervalue stocks, how high can the risk be?

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