There are three main types of analysis that investors use when making decisions about where to put their money:
- Fundamental Analysis
- Technical Analysis
- Macro Analysis.
But which one is the best? And which one should you be using?
Today, I’ll share with you my experiences with each of these methods. This post will probably stir up a few disagreements, especially those who have dedicated their entire lives to one camp over the other, but hopefully I can shed some light on which strategy might be best for you.
I myself began in the pure fundamental analysis camp having studied under the tutelage of Warren Buffet, Benjamin Graham, Phil Fisher, Peter Lynch and Sir John Templeton for a number of years.
When I began my journey, when asked, I would always just automatically answer proudly, I am a ‘Value Investor’, seeking to look for great companies selling at the right price. The motto ingrained within me was ‘Price is what you pay, value is what you get’.
As time progressed, I was also interested in other disciplines, like trading rather than just investing, thinking at the time, there has to be another way that is ‘faster’ at generating profits. Alas, I searched and attended many stock trading courses out in the market, even flying around the globe to attend these weekend seminars.
Of course, with trading, most focused on charting or better known as technical analysis, trying to use past price data to gauge where the market is currently at relative to where it has been, and to try to predict where it is headed. (Of course, the experienced traders know that this is quite futile as you will be lucky to get no more than 50% right from observing charts only)
Trend lines were subjectively drawn, with different pattern recognitions like head and shoulders, flags, pendants, support and resistance, Fibonacci lines, Elliot Waves, double tops, double bottoms, etc. It was mind-boggling that one can actually see so much in a chart and make out patterns even if they don’t really exist when you really want to trade! This was me.
On top of that, there are the technical tools like simple moving averages, exponential moving averages, ADX lines, MACD lines, the RSI, Stochastics, Williams % R etc. etc. which added to the confusion. If you are not careful, all these tools can actually be a hindrance rather than help, leading to analysis paralysis because one tool refutes the other and hence you end up sitting on the fence unsure if you should enter or not.
Finally, there is the Macro Economic Analysis camp where traders look purely to economic data like unemployment, interest rates, purchasing managers index, payroll data, consumer confidence, money supply and fund flows etc. etc.
I can tell you all this because I have studied and applied myself in all three camps. There is the popular saying that ‘One does not know it until practiced in reality’ which is what I did over the years. I began with Fundamental Analysis long term value investing, then moving over to shorter-term Technical Analysis trading and as far as proprietary day trading, and finally moving onto study Macro Analysis and seeing if applying that gave me an edge.
Why I Switched Disciplines So Often (And My Discovery)
You may be wondering why I jumped from one discipline to another over the years.
My simple answer? Passion and Love of this game. The Global Financial Crisis (GFC) was also a major contributing factor that changed how I thought about investing and affected me personally because I also manage money professionally.
However, when the GFC came and our long term portfolio of even the greatest businesses on the planet halved in value, it hurt emotionally.
It is one thing to temporarily lose half the funds in your own account, but to lose half of others’ funds is a very different matter. Although thankfully no investor actually questioned the performance or withdrew their funds from my management, personally I knew I did not want this to happen again.
The silver lining through the occurrence of the GFC was it forced me to go in search far and wide for an alternative as well as begin to seriously question everything I knew at the time and what else could I add into my investment and trading processes.
I asked the most important question I think all investors and traders should ask themselves:
Is what I am doing creating the optimal balance between risk and reward and what do I actually enjoy doing daily?
By questioning myself, I came up with a further and most important question of my career;
What if I combined ALL three disciplines into my investment and trading approach and would that have any positive affect on my performance short, medium and long term.
Answer. A very big YES it did!
- By simply combining the Fundamental Analysis of companies and therefore only investing or trading the financially strongest listed stocks on the market, then
- Overlaying that with Technical Analysis to simply improve the entry or exit and importantly avoid ‘catching the proverbial falling knife’, and then to finally
- Overlay the final foundation of Market Analysis which gives you a much broader picture of the safety of the current environment which determines if you should be in the market of not, the performance you can achieve and most importantly the extreme reduction of risk to achieve your return outcome is extraordinary.
Do not get me wrong, I know of great pure value investors and fund managers and I also know of great pure chart traders, proprietary tape reading traders as well as macro traders who do just fine without combining all three disciplines. However, this is rare, especially if you are looking at succeeding in the long term.
Why do you think the statistics show that well over 90% of fund managers don’t actually beat the market index over a 10 year period. And they are supposedly the pros doing it every day!
This has been my experience over the past fifteen years of being involved in the markets.
In future posts, I will go deeper into how I personally combine all three disciplines to achieve more risk-managed profits in the markets.
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