Which is better?
It depends upon the investor and their preferred style. I have studied technical analysis but today put very little reliance on it, apart from being careful with securities that have low trading volumes. Because they are illiquid, it can be hard to sell out in future, so this has to be considered carefully.
I like fundamental analysis because it looks at intrinsic value (I am a big follower of Warren Buffett). Intrinsic value is based upon a company’s ability to generate cash flow. To make a determination of potential cash flow in future requires fundamental analysis.
I don’t really time the market at all but when I have the cash and the market is down, I tend to put more in on a portfolio basis, usually into managed funds. I set aside an allocation of the portfolio for specific opportunities I identify from time to time, based upon fundamental analysis.
What individuals should do really depends on their investment time horizon, risk appetite, tolerance for losses (which can stress you out!), current cash flow needs and a host of other things. You have really got to think these through before you do anything.
Tags: investing, fundamental analysis, technical analysis, market timing, risk appetite, managed funds
April 28, 2008 at 1:16 am |
I’ve tested a lot of the methods used by proponents of technical analysis and chart reading. It suffices to say that none of them produced results superior to random trading. I’ve written a short post about this on my blog:
http://margincall.wordpress.com/2008/04/27/the-dark-ages-of-trading/
In short, I think traders these days live in the dark ages, and they use abstruse chart patterns and pseudoscientific indicators in order to create the illusion of understanding and control. It’s very similar to the way ancient humans turned to astrology to explain the events of their lives.
Speculators would be better off if they just admitted to themselves that, while not totally arbitrary, stock prices are highly random and canned chart patterns and pseudo-scientific technical indicators have no predictive significance.