Fundamental versus Technical Analysis – Part 1 of 3

No, I am not going to explain via numbers and ratios. That’s so left-brained! Let me try with a right-brained approach.

Fundamental Analysis

Investors who favour this analytical approach like to comb through the published financial reports of companies with glee as they try to fish out useful nuggets of information for their buy/sell decisions.

There are 2 major sub-groups of this school:

1)      Numbers R’ Us

2)      Lazy bums

Numbers R’ Us

This group loves to dive into the balance sheet, Profit & Loss, and Cash Flow statements. Not only that, they will read and decipher every word/number in the appendixes! Numbers R’ Us are hard-core number crunchers! They would create their own spread-sheets and track the ratios of their beloved companies quarterly and annually.

   

I am puzzled as the only numbers I am interested in are: 36, 24, 36.

However, I treat these people with respect as they are frequently the early ones who can “smell” something is “fishy” just by looking at the numbers – especially when they don’t add up!

When in doubt, they vote with their feet and stay out.

Another interesting trait is they trust their own financial detective skills – they take responsibility for their own investment decisions. Hence you won’t find them suing the banks or blaming the authorities if they have bought Lehman mini-bonds.

For eg, if they invest in an S-chip (China companies listed in SGX), they do so with eyes opened.

Lazy bums

This group of “fundamental analysts” are outright lazy or don’t know what to look for in the numbers…

So they rely heavily on 3^rd parties to do the summaries for them. So they download brokerage reports and read what financial bloggers have to say. Listen and watch CNBC or Bloomberg commentaries – what is said in the media must be true! No?

One obvious trait is they like to quote who said what or who wrote what. They are quick to follow advice; but when things go awry, they are equally quick to “outsource” responsibility!

Eh… Are they using Fundamental Analysis? Well, they can quote the P/E ratios, net asset values, P/B, dividend yields as good as their Numbers R’ Us brethren. Just don’t ask them how these numbers were derived!

For eg, if they invest in an S-chip, they go in following the “backside” of others.

The truth about Fundamental Analysis

When you look at the Sun, you are not looking at the “real” Sun. What you are watching is the image of the sun 8 minutes ago. That’s how long the light from the Sun takes to reach Earth!

It’s the same when you look into the mirror. You are looking what you were 2 nano seconds ago. 1 nano second for the light from you to reach the mirror; 1 nano second from the mirror back to your eyes.

There lies the truth about Fundamental Analysis! Unless you are an insider, everything in the market is old news to someone else!

All published statements or reports have a time lag. The question you have to ask is how high or low in the information food chain do you belong to?

In the middle ages, by looking at the Sun, it was the obvious “truth” that the Sun revolves round the Earth. It was Nicolaus Copernicus that pointed out that it’s in fact Earth that’s revolving round the Sun!

So next time you are doing your own fundamental analysis or reading a brokerage analyst’s report, you may want to pause and reflect:

Are you listening to the “obvious” truth (the spin others are giving you), or can you see beyond the numbers just like Copernicus?

Next post I will talk about Technical Analysis.