Using both Fundamental Analysis and Technical Analysis

Fundamental analysis and technical analysis are the two valuable tools available to the investor. Technical analysis is now well established as a technique and yet there remains a bias against it despite ample evidence for its value as an investment tool. In my experience to get the best result as an investor needs to take advantage of both fundamental analysis and technical analysis.

An important application of technical analysis is its use in timing the market. There are two components to timing the market.

  • To control market risk. Which simply means that an investor avoids buying stocks in a bear market or during a market correction.
  • To control specific risk. Specific risk refers to the risk associated with a specific stock. If an investor uses technical analysis to avoid buying stocks which are in a downtrend, then specific risk is significantly reduced.

Perhaps one reason that investors do not use technical analysis to time the market is the adverse publicity given to market timing by fund managers who say that you cannot time the market and that investing is too complex for the small investor. What they really mean, (but do not tell us) is, “give us your money and we will be in the market all the time and collect a fee whether your investment makes money or loses money.”

And yet many professional managers whose funds continue to underperform the index refuse to use technical analysis. One such example is the Clime Australian Value fund which does not apply technical analysis and over many years has at best, tracked the index. Over many years, the investor in such a fund has paid high fees while his funds continue to underperform the index. The smart investor could use an ETF market tracker to obtain a better result with much lower costs.

My experience is that technical analysis does give investors an edge but the real advantage comes by combining both fundamental analysis and technical analysis. So the investor who buys stocks which have a high ROE and increasing earnings per share with low debt, as well as being in an uptrend, is using both approaches and has a big advantage.

Investing is not easy, so why not use the all of the available tools to gain an advantage in what is a very challenging undertaking?

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