Ever wondered what is the difference between Fundamental and Technical approaches to Stock Picking? Is Technical Analysis a form of betting your money? Is only investing with Fundamentals in mind enough? Hope you are all enjoying the upswing in the market post March, 2020. Sensex & Nifty has bounced back & have bounced back in a really awesome way. I wrote an article (IS THIS THE RIGHT TIME TO INVEST IN STOCK MARKETS) couple of months back when the overall market was bearish and those who shopped for quality stocks at that time, & are sitting on huge (Notional / booked) profits.
Now let’s have an article on which approach is much better and advantageous for stock picking. One set is purely on Fundamentals & the other is purely on Technical. If you are wondering what this really means, don’t worry. We will clear this confusion in this article.
I have heard a lot of people calling Technical analysts as Gamblers and Betters. There is a great respect for Fundamental analysts also. Many people stay away from markets after losing huge sums to hot tips of Technical Calls from Technical Analysts. So this is the reason I chose this topic, because we need to understand both approaches in this dynamic market. It’s something everyone needs to know and digest so that wealth can be made from investing in businesses. Technical analysts make fantastic returns in the markets mainly with their discipline & emotions.
So Let us first understand the two words – Fundamentals & Technicals.
A basic general criteria for any business is that it needs to be fundamentally strong. What this means is that the company needs to be performing well consistently and hence providing handsome returns to shareholders. Some of the fundamental criteria for any business is:
1) Promoter’s strength & integrity
2) Past Growth rate of the business
3) Potential to grow in the future with the same growth rate
4) Use of working capital efficiently to increase profits
5) Rewarding shareholders with dividends
6) Able to run the business with lesser debt
7) Have positive cash flow so that business is able to sustain in down times
8) Grow market share consistently & retain it
9) Turnaround in business growth
10) Paying tax regularly & strong balance sheet
I have listed a few above. Now, Fundamental analysts look at the criteria above & may be few more before picking a business to invest in. When the business is meeting most of the strong fundamental requirements, it becomes attractive to fundamental buyers. Fundamental Analysts make calculations based on the balance sheet and future potential and come up with a valuation for the business. If the stock is trading well below the valuation, they buy it. Even if the share falls further, they do not sell it. They hold on if the fundamentals of the company are strong enough. In fact they might even add few more to their existing holding. They generally sell the business only when one of the following happens:
1) They need money badly and hence have to liquidate
2) Fundamentals are weakened
3) Share price goes way above their valuation
Since market ups and downs are not in anyone’s control, fundamental analysts sometimes wait for years & years & make handsome returns. They mostly never lose money since they are invested purely & purely based on the fundamental strength of the company. They strongly believe in betting on fundamentals of a company hoping that markets will pay for the growth and potential of the company. Also, compounding always works on long term. So to summarize the investment approach for fundamental analysts is Compound money, no matter how much time it takes.
We need to remember that the value of any business is after all, how much a buyer would pay for the business. It is never on how much the seller quotes in a dynamic market such as in ours. Because in markets, it is important that more & more investors buy the stock & hence it moves up. Buying or selling interest is a key element to stock price movement. Unless demand picks up stocks will not rise & unless supply picks up stocks will not fall.
Keeping this in mind, let us move on to technical’s part.
For technical analysts, timing is everything. They work on charts of stocks.
In stock markets, information is everything. Traders who get any news first make the most of any stock movements. The retailers like us generally get news last on TV channels and we enter at the fag end of the movement. Great results, big money deals in a business, a loss making unit being sold off, some big order wins, release of pledge by promoters, etc. are some of the information which will make a stock run up. Rising prices of raw materials, shares getting pledged without justification, union problems in companies, forgery in balance sheets, government interventions which impacts certain businesses negatively, etc. will make a stock run down quickly.
The thumb rule is, they study the charts carefully, a stock price begins to react even before the news is actually out. Whether there is the positive or negative news, stock price movement begins before the actual event happens. So, a technical analyst analyses a chart of a stock and tries to find out if some action is happening. They ideally need not have any idea of the fundamentals of the business. Decisions are purely based on chart movements. When the chart shows that there is heavy accumulation with volume, or a major breakout of a resistance, they buy heavily without even looking at whether the stock is fundamentally strong or not. If the chart shows heavy selling or breaks some major support points, they sell the stock like there is no tomorrow. Technical analysis is a vast field in itself and takes a lifetime to perfectly understand it.
Few points to be noted in the world of technical:-
1) Exit is harder and important in this market than Entry
2) Technical analysis is a golden tool to decide Exit from a stock
3) Price & Volume if used effectively, then one can make big money in Short Span of time
4) Sometimes news burst later while market makers discount the event prior. In such case technical analysis help us to know that major event, before it come in general public, with the help of Price & Volume.
So in short Fundamental Analysts tell us what to buy & technical analysts tell us when to buy & most importantly when to Exit & Encash the profits. However, technical analysts need not always be right. Hence, they always place their money with a Stop loss. Few technical analysts will book the losses the moment their stop loss gets triggered or book the profits the moment their targets are hit. They need to be extremely disciplined and need to closely watch their stock movements every single day. They will go through multiple emotions like excitement, stress, happiness, anger and also high blood pressure since they watch their stocks very closely. On the other hand, fundamental analyst only needs to ensure that every quarter, the business performs as per his/her expectations. If fundamentals have not changed, a fundamental analyst will add more of a business at a lower price.
So what’s the best combination? Just being a good fundamental or a technical analyst might not be enough in the markets. If we can strive to develop a good combination of both fundamentals and technical’s, we can make fantastic returns in the markets. If a stock is fundamentally looking cheap, buying after a technical breakout etc. can give huge multi-bagger returns. Also, if we are holding on to a stock which is being sold with heavy volumes, it might help to recheck our fundamentals and help in taking a wise decision.
So let’s respect both fundamental & technical analysts, & let us develop the Art of picking the stocks & be open to various approaches in creating massive wealth in the Stock Markets.
So BE FEARLESS. Do not time the Markets.
Pick your companies well and I assure you that you will be rewarded in the long term. Don’t be bothered if you bought a solid company and the market price is falling without any reason. Many times, our pockets are not deep enough to keep buying when a stock falls without any reason. You are not alone, if a stock falls without any reason just because the market is going downwards, it is bound to come back. Keep a strong mind, Keep up with your patience level. Start investing for yourself. It’s the best gift you can give it to yourself at this particular time. Remain invested for long period of time. Keep Buying, Hold if already invested. Don’t create & spread panic.
No matter what happens, we will beat this too the way we have beaten all of them in the past.
THIS TOO SHALL PASS.
Stay Home, Stay safe, Stay Humble, Remain Down to Earth, Don’t break the lockdown rules. Feed the poor. They need our support more than anything else during these tough times.
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