We speak so favorably of value investing, fundamental analysis and Benajamin Graham it should be noted what in contrast are we speaking of. Our style of investing is the opposite of such types of investing as: technical analysis/trading, momentum trading, or scalping. This issue will go into depth to create an understanding of these forms of investing and why we feel they are inferior to value investing/fundamental research.
First lets look at technical analysis and trading. Technical traders are obsessed with charts and graphs looking at past performance trying to find trends that dictate future results. More specifically, they are looking for signals that will tell them whether to buy or sell the security by analyzing charts These investors will look at peaks and valleys of the chart trying to find signs of resistance and support. For instance if a stock is trading near its support level, a technical investor may perceive this to mean it’s a keen buying opportunity as its near its figurative low. Another tool used is moving averages where averages are calculated to create a smooth line that runs (usually) upwards or downwards of the actual stocks daily closes. This, according to technical investors, speaks of when buying and selling opportunities exist.
We are not discrediting the potential benefits for looking at a stocks past performance via charts and graphs. It creates an interesting picture of the past for the company, but where we respectfully disagree is by allowing past performance to dictate future. Trends are purely that, trends, and cannot guarantee future performance. In addition, by looking purely at technical charts you are neglecting to actually analyze the company, you are only looking at the stock. Remember from our previous issues the distinction between stock and company ownership.
Let us move to momentum trading. With this style of trading, you look for high volume stocks and literally ride the wave and exit before the ride is over. Its pure timing that drives this form of trading and you are literally looking at a chart and volume, sometimes not even paying attention to what company you are investing. This is easy for us to pick apart for the reasons stated prior and the fact that you are essentially picking the good-looking horse to win the race.
Finally, let us speak of scalping and the issues that are raised with this form. This is making hundreds of trades per day by exploiting the bid-ask spread. This is the difference in price between the buyers and the sellers, or the neutral ground between the two. Each trade might only reap a small profit, but multiplied by hundreds a day can potentially generate substantial profits. Again, for the same reasons stated prior we feel this a substandard form of investing.
Concluding, we feel that fundamental/value investing is the best form available, and with the proper research and time spent one can choose stocks accurately and eventually profitably. The greatest investor alive, Warren Buffett, is not a technical investor he follows the teaching of Ben Graham and we have 100% faith in their proven track record and will continue to devote our time to their teachings.
Credit is due to Investopedia.com for helping in some terms of technical investing