Analysts' Battle: Which Approach Is Best?


In the investment world, there is a persistent tension between the fundamental and the technical approach. Fundamental analysts often look down with a certain disdain on those reading the tea leaves. Technical analysts, on the other hand, shake their heads with pity at yet another "madame soleil" who, thanks to her crystal ball, considers herself smarter than the market. However, the two methods are not mutually exclusive. On the contrary, if the fundamental and technical analysis are integrated in one symbiotic investment process, this leads to superior results. We are convinced of that at expatwealthatwork. After all, fundamental and technical analysis are not as far apart as the extremists from both schools would have you believe.

Technical analysis: what will the stock price do?

Technical analysts study charts and use them to make predictions about the future based on the premise that what happened in the past will repeat itself. That being said, it does seem a bit thin. But let's not forget what the stock exchange is in essence: a place where all market participants come together to act on their ideas and views. The price chart is an externalisation of the sentiment of all participants in the market. Technical analysts gauge the mood of the market and, backed by statistics, try to extract future price movements from past patterns.

Fundamental analysis: what is the value of the company?

Fundamental analysts like to boast that, based on a thorough study of the strategy and the results, they calculate the value of a company ahead of the market. However, some humility is in order here. After all, it is often only in the rear-view mirror that it becomes clear whether or not the strategy was a success and why. Past results are no guarantee of the future, yet they are the foundation on which estimates for future growth and profitability are based. No valuation method can completely escape market sentiment. For the free cash flow model, the interest rate and risk premium are crucial parameters, while the multiple approach reverts to historical valuations and statistics.

The fundamental-technical symbiosis

Neither the technical nor the fundamental analysis has a monopoly on the truth. The price target does not exist. Nor the value. It is often the circumstances that determine which method is given the greatest weight in the ultimate investment decision. The fundamental work results in a valuation range within which technical trading can take place. If the price of a share, in this case, moves outside that range, then things really get interesting. Both up and down the market tends to exaggerate. The technical analysis can prevent the investor from buying or selling too early. At the same time, fundamental analysis will light up red or green if the valuation moves too far in one direction or another.

Assets with no return value and macroeconomic variables are primarily technically trackable. Of course, the evolution of raw materials, interest and currencies is also the result of dynamics that can be fundamentally estimated, but the feedback loops are so large that any model, no matter how sophisticated, is bound to fail. A historical study of which actions led to which reactions can offer some guidance, but will mainly cause a lot of confusion. Unlike the exact sciences, economics cannot be subjected to experiments.

Fundamental and technical analysis are therefore not opposites, but complementary. Technical analysts blind to valuation risk falling into the trap along with the herd. Fundamental analysts with no sense of sentiment all too often become isolated from the herd. Walking in pairs will not only avoid slings and traps, but will also discover watering holes faster.

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