Which is better, fundamental analysis or technical analysis? Trading or investing? which is powerful? which is more relevant? I’ve heard these questions couple of times and it’s quite interesting to give it a time to dig in. It’s like asking a kid if he likes “The Avengers” or “Justice League”, Superman or Batman. He must choose to which side he’s on.
Stock Market has two school of thoughts: Fundamental Analysis and Technical Analysis. One is for the investors and the other is for the traders. One for the long-term, the other one is for short-term. The first is a best-selling book, the other one is a blockbuster movie. Different strokes for different folks. It’s on your hands now on what to take and see it yourself.
Are you a fan of superheroes? kindly read my previous blog: The League of Superstocks for Long-term investors.
What is Fundamental Analysis?
Fundamental Analysis is the study of a company’s financial statements to analyze assets, liabilities and earnings, financial health, its competitive edge and markets. It has also got to do with looking at the financial ratios of a company and determining its strength financially, its value and future potentials.
Warren Buffett: “The sage of Omaha”
Warren Buffett is an American businessman, investor, and philanthropist who serves as the chairman and CEO of Berkshire Hathaway.
- By the end of 2013, Buffett had a net worth of $59 billion. On average, he made $37 million a day in 2013, which was fueled by rising stock prices.
- Nearly 94% of his wealth was earned after he turned 60. At 60, he was worth more than $3.8 billion.
- Out of all investing legends, Buffett has the best track record for beating the market. He has crushed the market over the years.
- Warren Buffett has a net worth of more than $87 billion today. His net worth is greater than the GDP of the country of Uruguay.
Advantages of Fundamental Analysis:
1. Fundamental Analysis enables you to read the pulse of the company.
It is for forecasting long-term company growth. It answers “what’s the best stock to buy”?
2. You can understand the financial dynamics within the company and determine whether is it in a good state or if there are some problems.
3. It gives long-term perspective of company. So you can take long term decision to invest.
4. It gives you the ability to identify and predict long-term economic or consumer trends.
It can benefit patient investors who pick the right industry groups or companies
5. Sound fundamental analysis will help identify companies that represent a good value.
Some of the most legendary investors think long-term and do value investing
Disadvantages of Fundamental Analysis:
1. You might have good stocks at a wrong time.
It may take effect for couple of years and you may need to hold on to the stock for a long time
2. They are tedious and time consuming.
It deals with tremendous amount of data and tends to specialize in one market.
3. It is difficult to understand for a new and average investors.
4. Fundamental analysis needs lot of data like companies income,expenses,future plans,assets,liabilities, etc…
5. Fundamental Analysis doesn’t consider the irrational behavior.
Some stocks are considered darling of the crowd and it doesn’t matter what their earnings results are. People keep on buying.
What is Technical Analysis?
Technical Analysis is the study of price movements primarily through the use of charts for the purpose of forecasting future movements. It is the study of the changes between supply and demand in relation to price movements.
Jesse Livermore: “Boy Plunger”
Jesse Livermore is considered as one of the greatest traders of all time. Many professional traders today are still applying his trading style and strategies. He started trading at 14 years old.
- He traded on his own fund, his own system, and not trading on anyone else’s capital
- Filed bankruptcy multiple times but recouped his losses.
- He earned $ 1 Million in a single day during market crash in 1907.
- His net worth was $100 Million in 1929 ( $1.5-13 Billion in today’s value depending on the index used) but Jesse Livermore’s net worth went down $5 Million in 1940.
- Published his own book “How to trade in stocks”
Advantages of Technical Analysis:
1. It provides current and relevant information.
Everything that can affect the price is already factored into the price movement. It provides information in one glance.
2. Technical Analysis can be applicable to any market using the same system.
3. It gives hint on when to buy and when to sell.
With the proper use of price patterns and indicators, you will have the ability to interpret the entry and exit point of the stock. It will allow you to maximize your gain.
4. Absolutely inexpensive.
5. Short-term opportunities for profit.
It provides a short-term market indications. You can time your entry, minimize losses, set target price and get the goal you want. It’s more specific.
Disadvantages of Technical Analysis:
1. Technical indicator’s opposing signals.
One indicator will suggest buying but the other indicator may suggest selling
2. Technical Analysis is subjective.
Two traders may look at the same chart and might give different conclusions .
3.Too many indicators can alter the chart.
To the newbies, too many indicators can produce confusing signals which may affect your analysis.
4. Fundamental Analysis ignored.
Pure technical analysis does not take into account the underlying fundamentals of a company. This can prove risky in case of long time frames.
5. Technical Analysis takes time to master.
To have consistent returns and good performance, you must apply it on a regular basis with a strict discipline.
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