When I started learning about stock trading and investing 20 years ago, I learned that there were 2 approaches: fundamental analysis and technical analysis.
Fundamental Analysis (also called Value Analysis or Value Investing) is the study of the underlying business behind the stock, which meant one had to pore over annual reports, financial statements and understand the value of the business itself. The idea was that one could find a good stock that was currently undervalued at the current market price, maybe because there is a temporary setback or simply because people have not begun to notice it yet.
Technical Analysis, on the other hand, is the study of price movement — that is, by studying price charts, and how price goes up and down in the past, and the volume of transactions, one can make certain predictions on how it will perform in the future.
A fundamental purist is therefore one who does not care about price movement, except to check if the business is currently overvalued or undervalued at the current price. A technical purist, however, does not look at the underlying business. He believes that everything that can be known about a stock is reflected in its price, or how the market currently perceives it. So if one understands how to “read” the market, one can make intelligent guesses on whether the price will move up or down, and trade accordingly.
I used to be a fundamental purist. I looked up to possibly the most famous and successful value investor, Warren Buffett, who has consistently ranked among the top 5 richest people in the world for the past 2 decades. Buffett is known for his uncanny investments, spotting great businesses at bargain prices. He would later on buy entire businesses outright rather than just investing in their stocks. He is also known for disdain of technical analysis, having once remarked, “I realized technical analysis doesn’t work when I turned the charts upside down and didn’t get a different answer.”
So I looked at technical analysis with the same disdain, ranking it only a notch higher than reading palms or tea leaves. For all the technicians charts and graphs, I yet had to find successful traders with results like Buffett, or his mentor Benjamin Graham, or Peter Lynch, and so on. I used to troll people who do technical analysis with comments such as, “Well, here’s how I look at that chart. If it doesn’t go up, it’s going to go down.”
My recent interest in cryptocurrency, however, has forced me to take a second look at technical analysis.
Email me at andy@freethinking.me. View previous articles at www.freethinking.me.