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Whose Side Are You On?

By Chris Rowe November 9, 2022 Facebook Logo Twitter Logo Email Logo LinkedIn Logo

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Editor's Note: The election is behind us (but, alas, a lot of counting and contention remains ahead). So be it. Today we revisit a classic Chris Rowe column that dealt with a particular "us-versus-them" investing theme. 

Enjoy!

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It's probably the longest running dispute in modern market history.

No, I don't mean the battles between "Republicans" and "Democrats".

I mean the debate over Fundamental Analysis vs. Technical Analysis.

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The Fundamentalist focuses on (what he or she believes to be ) the cause of a market movement.  The Technician focuses on the effect.

Fundamental analysis involves determining a company’s value by analyzing things like: debt, future earnings, discounted cash flow, return on capital, return on equity, products, market share, competitive strategy, and so on.

The very basic concept is to buy public companies (shares of their stock) when they are trading at a significant discount to their "true value", believing that the rest of the stock market will eventually recognize that value.

A fundamentalist would then continue to buy the stock until it reaches the "true value" price.

Fundamental analysts believe they are arriving at valuations that are at odds with the majority of Wall Street.  In fact, the fundamental analyst often operates under the assumption that everyone else has got it wrong.

Now, there are obviously some misunderstood (and mis-priced) companies out there.  But it's quite impudent (and risky) to suggest that all of Wall Street is misguided and that you're the only one who's got it right.

All that said, I definitely recommend you explore fundamental analysis.  It’s far from a waste of time.  You can easily learn the beginner-level basics from books by William O’Neil, whose focus is mainly on stocks of companies that are in the growth phase.

There is a whole other world out there that will focus on the importance of earnings, revenue growth (most importantly earnings and revenue acceleration), improving profit margins, management ownership, and so on.

For more advanced fundamental analysis, you should study the principles and thoughts of Graham and Dodd, Warren Buffet, and Charlie Munger in Berkshire Hathaway’s annual reports.

A great volume called The Essays of Warren Buffett comes to mind. Others include The Warren Buffett Way and The Intelligent Investor.  If you want to get really deep, you can read Security Analysis by Graham and Dodd.

All of True Market Insider's educational programs are designed to benefit you no matter how deeply you want to get into your analysis.  As a rule, the deeper you're willing to dive, the greater the rewards you'll receive.

However, you don’t want to miss the forest for the trees.  It’s important not to lose sight of the big picture.

So, if you’re the type who wants to dive head first into some serious investing, if you want to feel super confident in your investments like I do... then don’t be afraid to call the company up, ask to speak to “investor relations”, and start asking questions. You can find the phone numbers you're looking for on the company websites.

Or enter the company's stock symbol on Yahoo Finance and click on “Profile” to find their phone number.

Have an organized list of well thought out questions ready before picking up the phone.  Don’t know what to ask? Don't worry...

Just listen to their past conference calls which are probably on the company’s website.  Read past earnings reports.  Read the company’s annual report. Highlight some things that interest you.

When you get someone on the phone, ask them, "Why should I buy your stock now"?  "What challenges does the company currently face"? and "Who are your main competitors?"

Be sure to write down the answers.

Remember, you want them to take you seriously.  You don’t want them to think you’re wasting their time.  (You should also look around the company’s website before calling them, because most of your questions will be answered on the site.)

Above all, don’t be intimidated -- investor relations is there for you.  I used to call companies all the time when I was a small broker with a small client base.  I'd tell them I was a huge money manager and I wanted to understand their company.  They had no problem spending time with me and making sure I was comfortable.

Today, I just tell them who I am and what I do, and they give me the same treatment.

Again, this isn’t a treatise on fundamental analysis, but I wanted to get those suggestions off my chest.  That's because so many people are afraid to do this. Then, because they don’t feel confident enough about anything they own, they over-diversify into a large number of companies (which they also don’t know), and that ends up hurting their returns.

If you want to invest real money for real profits, I suggest you do at least some digging.

Getting Back To Technical Analysis…

Some technicians barely know the companies behind the stocks they’re investing in.  Some fundamentalists will never consider any technical concepts as an aid to timing their entry or exit points.

But in reality, most stock market players take both approaches into consideration.

I believe that as a trader or investor, you must be able to recognize the current market condition and environment (the risk and the trend) from a technical standpoint.  That’s what I've spent more than a decade teaching.

One last word on the fundamentalist vs. the technician: Often, market price tends to lead the known fundamentals.  In fact, you probably noticed that stocks tend to start their downward or upward move before the reason is apparent to the public.

I’m not just talking here about insiders moving on a stock before the news is announced... or a stock moving higher because a company wanting to acquire another company buys as much stock as it can in the public markets before making a formal bid on the acquisition target.

I’m also talking about the fact that major bull or bear markets have ended... and the market has started to move in the opposite direction well before any perceived change in the fundamentals.

I'll have a lot more to say about this going forward.

See you soon!

Chris

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