A slight departure from exclusively Elliott Wave programing this week, prompted by questions from readers over the past few weeks about how I relate Elliott Wave analysis to the fundamentals of the business I am analyzing.
An Age Old Debate
Over time technical versus fundamental analysis has been a hotly debated issue in some quarters of the investment community, with technical analysis gaining more general acceptance. I think I can modestly say that I have a very strong background in both. I use technical analysis for my share own investing decisions and but my qualifications and experience are in the ‘’fundamentals’’. In fact this was all I knew up until I started investing for myself.
As an analyst in business I had never heard of so called technical analysis, however 20 years ago when I started actively investing / trading stocks on my own account, I quickly learned that technical analysis was a valuable tool. I had started out with a couple of brutal years investing exclusively using the fundamental approach. After finding technical analysis I added it to my analysis and it have used it as my primary method of selecting investments for the last 15 years... and I would say I have used it very successfully.
However, most of the volume transacted on the share market is still based on decisions using the fundamental approach. It is the convention used by banks, investments funds, superannuation funds etc. However the technical analysis methodology has gained respectability over time, with most professional fund managers working for banks and other investment institutions including it in their analysis too.
Overwhelmed By Too Much Information
Fundamental analysis focuses on company reports such as P&L statements and balance sheets – micro economics. Individual companies are measured against their sector and the overall economic outlook – both domestic and international. Most banks and major institutions have analysts who plough through accounting reports and the big analysts will get interviews with company senior management to drill down beneath the figures and get management view on the forward outlook.
I knew no other world till I started investing on my own account. At that time, I poured over the annual reports of dozens of companies trying to find value. I would also go to numerous broker/analyst’s meetings but in most cases I would leave the meeting baffled and in numerous cases had no sense of confidence in what I was hearing. In summary there was an absolute mountain of information to digest and in the meantime, I was almost frozen into indecision. Not actually doing a lot of investing.
Out of frustration I searched for a better way. I discovered what is known as ‘technical analysis’. I had an early sense this approach could work well for me and I studied it feverishly night and day. There are literally hundreds of ways to analyze markets using such analysis techniques as moving averages, Stochastics, RSI and numerous others. I studied everything I could get my hands. But again, I became overawed by the numerous options.
This is a common problem for Investors who are trying to manage their own money ... There is a plethora of information and approaches which become overwhelming and they can't put it all into practice. Many investors I have known over the years never quite get past the hurdle of selecting from the literally hundreds of ways to analyze.
I eventually settled for Elliott Wave and have used it almost exclusively over the last 15 years, but I think the lesson for you as a private investor is you need to find an approach that is manageable without all of the resources of a bank or fund manager. Making technical analysis a part of your approach definitely helps with that!
The Automation of Analysis
Twenty years ago, the computerized analysis available to retail investors was primarily ‘’technical’’ but now there are also sophisticated computerized analysis tools analyzing the fundamentals of a company too. HUBB offers some great tools like ValueGain in this category. These tools are affordable for the average investor and avoid the need to pour over mountains of reading.
These days, while I still rely primarily on Elliott Wave analysis for my investing its easy to incorporate fundamental analysis software to do much of the heavy lifting in analyzing micro/macroeconomics information to assist with stock selection. At HUBB we call this integrated investing.
Choose What's Right for You
In summary, it can all be somewhat overwhelming, but I hope I can take some of the fear and guess work out of share market decision making, whether you choose either technicals or fundamentals.
One thing I do know is that it is essential to put some effort into understanding these various approaches to identify what will work best for you. Even if you use a financial adviser you still need to have sufficient knowledge to manage your advisor. You need this knowledge as a minimum even if just as a safety net.
Enjoy the ride