Technical vs fundamental trading

[Iron]

I'm in the latter camp as regards long-term financial trading:

A. Fundamental trading requires lots of time - you need to thoroughly research a company and the economy and the industry in which it sits. Technical trading can be done in minutes - you simply spot a pattern and buy or sell.

B. Even if you can find value through fundamental analysis, you're up against the fact that, in the market, perception is reality. Let's say you buy some shares at £10, and in 12 months' time they've fallen to £8. By that time, the fundamentals may have changed, and the true value of the shares may be less than £10.

Technical trading is backed by evidence. See, for example, the links on this site: http://www.trendfollowing.com/perf.html.

Some of those results are much more impressive than those of the $69 billion (http://en.wikipedia.org/wiki/Fidelity_Investments) Fidelity Contrafund: http://personal.fidelity.com/products/f ... ?316071109. Thirty percent over 10 years means that you'd have barely kept up with inflation!

Some people may say that you can't make money without knowing about what you're buying and selling - try telling that to a trend follower by the name of John W Henry, who's just bought a large football club...

What do you guys think?

Jeff

[Euler]

If you are short term then I guess technicals will work for you but after years of messing around in many different areas I settled on fundamentals. I'm a good old fashioned long term investor than trader on financial markets.

I worked out when I was younger that if you are in debt you effectively spending your life working for others. I like the idea of being a lender than borrower of money and investing achieves that for me.

[Iron]

Hi Euler

Is there not a substantial risk with long-term investing that the fundamentals will change, by which time you can only sell your shares at a loss?

Jeff

I worked out when I was younger that if you are in debt you effectively spending your life working for others. I like the idea of being a lender than borrower of money and investing achieves that for me.

[Euler]

No, especially if you get an income off the company your risk reduces with time not increases. I just focus on what an investment can and is likely to yield, with some caution thrown in, and then I just buy it when it falls in the realms of value.

I don't put much emphasis on recent results, I am more interested in the long term results and competitives.

[Iron]

Let's say you buy shares today in Widget Plc, a company with great prospects on paper, at £10.00 a share.

Six months later, the price is £8.00 a share, due to the market's herd-like behaviour. Suddenly, the Bank of England decides to raise interest rates. Sterling soars, which all but chokes off Widget Plc's valuable export market. And as homeowners are spending more of their income servicing their debts, domestic demand isn't great either.

You now have a choice: take a haircut, or hope and pray that the situation eventually recovers. Neither option would excite me...

Jeff

No, especially if you get an income off the company your risk reduces with time not increases. I just focus on what an investment can and is likely to yield, with some caution thrown in, and then I just buy it when it falls in the realms of value.

I don't put much emphasis on recent results, I am more interested in the long term results and competitives.

[Euler]

I bought McDonalds at $15 in 2003

http://www3.valueline.com/dow30/f5707.pdf

Look at the price vs the earnings the company generated. I now yield 16% PA on the shares on the original purchase price in dividends. I have little reason to sell even if the price crashes or they get in trouble.

[Iron]

A simple trend following approach, using moving average crossovers of 10 and 20 periods, would have also got you in that trade and kept you there. See attachment.

In this case, the market and the dividends performed as you had expected. But the law of averages says that, however thorough your research is, there will be times when both go against you.

Jeff

I bought McDonalds at $15 in 2003

http://www3.valueline.com/dow30/f5707.pdf

Look at the price vs the earnings the company generated. I now yield 16% PA on the shares on the original purchase price in dividends. I have little reason to sell even if the price crashes or they get in trouble.

[Euler]

When investing your strike rates is exceptionally high if you buy at sensible prices. The returns dwarf the odd mistake.

[Iron]

That may well be the case in normal economic times.

But if we have another market crash, all bets are off IMHO. Shares that are good value today might survive, but they might not. Personally, I wouldn't want to take the risk.

This might sound melodramatic, but I honestly think we could be heading for a depression. Mervyn King has this afternoon said that QE is still on the cards - it comes to something when a country feels it needs to print money!

Jeff

When investing your strike rates is exceptionally high if you buy at sensible prices. The returns dwarf the odd mistake.

[Euler]

When I first met Buffett I was really interested in whether I should take account of macroeconomic factors so that was my question to he. To cut a long conversation short, he said no. He reckons at the bottom of a market its very difficult to tell if you should hold off or not and in 1974, the best buying opportunity for decades there were an equal amount of postive and negative factors. He told me to give up on timing because I would spend the rest of my career learning that you couldn't reliably time the market.

IMHO, Captialism is about overcoming negatives and generally it does find a way through, but at the time it's difficult to see the wood for the trees. If you look at the current downturn nearly all the stock I invest in increased earnings during the sharpest downturn for some time. I just try and identify good companies and stick when them. As earnings rise that will eventually get discounted into the price and you get an income stream from that as well. I don't have to watch the progress every 15 seconds as well. Most of the companies I buy I would be happy for the market to shut down for ten years as I intend to hold for much longer than that.

[Iron]

When I first met Buffett I was really interested in whether I should take account of macroeconomic factors so that was my question to he. To cut a long conversation short, he said no.

I appreciate that there's no point in holding off investing because of uncertainties in the economy, as you would end up never making an investment.

However, I feel the point still stands that, with fundamental trading, there is a risk that you could end up owning devalued shares in struggling companies.

I seem to remember hearing once that, were it not for the bank bailouts a couple of years ago, even Buffett would have ended up with major losses.

Most of the companies I buy I would be happy for the market to shut down for ten years as I intend to hold for much longer than that.

Are you confident that they will still be here in 10 years' time if there is a major global depression?

Jeff

[Euler]

I'd probably come out of a depression in better shape than a lot of people. No doubt a depression would hurt but it's all relative if prices plunge to abnormally low levels. My fear in 1998 was that I was in a great position but that the banks would go pop and take all my spare cash with them. I already had money spread around a number of institutions before there was even a hint of trouble. That would have been a real bummer to call the situation right but not be able to do anything about it!

The great depression makes interesting reading. I hope all the politicians understand why that occurred. I read a lot of Keynes in my early years as he seemed to out think a lot of economic issues.

http://answers.google.com/answers/threadview?id=178334

http://www.businessweek.com/smallbiz/co ... 825689.htm

[CaerMyrddin]

Euler, I'm trying to set up my own value based strategy and it would be very nice if someone more experienced would back my ideas up a little.

I've been doing some research, and I've selected the first company to target.

http://www.boursorama.com/cours.phtml?symbole=1rLBRI

On a TA perspective it is acumulating for a long time now.

From a FA perspective, they've announced earnings of at least €0.32 per share in the next 5 years and they are buying their own shares from a 4% to 10% level (highly capitalized company ) which should reduce volatility and thus the risk. They own all the highways here (and it's not like everyone is going to start using helicopters tomorrow ) and they own a hightec solution to charge tolls that is being exported with success.

Well, assuming that my analisys is valid at this point, what would you consider a 'sensible' (on a Buffetian sense) price for this stock?

Thank you in advance!

[Euler]

Share buy backs are generally good. I'll email you an article I wrote on how to judge whether the company is right to return cash in one form or another.

On the wider note on this company it's difficult to directly advise if they are suitable or not as I don't know them well enough. The way I invest is to indentify good quality companies and do a rough valuation on them so I know when I would consider them to be value. But it's usually pretty easy without getting into complex maths or analysis.

If they have a good competitive position (usually resulting in long term profit growth, good RoE and margins) then you are effectively waiting for a temporary setback to send the price in value territory. The market often over reacts to 'bad' news.

In the case of MCD on this thread, I had researched them for ages and liked the way the company was run. They had achieved many years of consistant growth and were very stable and had considerable competitive advantage. I was also fairly comfortable with making some straight forward predictions about their business going forward.

The key for investing was when this fuss about fat people suing them came to light, the negative publicity resulting from it and the salad stuff they did. The press went to town on them and were delighted when the announced the first ever quarterly loss in their history. The truth was that the 'loss' was actually a one off re-org charge and the underlying business was actually in excellent shape. Also, during my research I had worked out that a lot of their underlying profits actually came from property and not burger flipping. So the impact of a delcine in business on the food side and then only at the McDonalds brand, was over done. It was a glourious buying opportunity.

[Iron]

The way I invest is to indentify good quality companies and do a rough valuation on them so I know when I would consider them to be value.

What is a company's intrinsic worth though?

Is it not a highly subjective matter?.

In the case of MCD on this thread, I had researched them for ages and liked the way the company was run.

When looking at how a company is run, is it not difficult to distinguish the corporate bs from the reality?

I'm sure we've all worked for companies whose public utterances are completely at odds with the reality on the ground! LOL!

Jeff