This article will probably be a bone of contention between many of my readers. This will probably be the case with people who have devoted their entire lives to either one of the main camps.
I began my career in the camp of pure fundamental analysis, as I studied under the practical guidance of Warren Buffett, Benjamin Graham, Phil Fisher, Peter Lynch, and Sir John Templeton for several years.
At the start of the journey, I always considered myself with pride as a Value Investor, looking for amazing companies selling at the right price. “Price is what you pay, value is what you get” was the motto that was ingrained in me.
As time moved on, I grew to be interested in other disciplines, such as trading rather than only investing, imagining that there had to be an alternative way that would generate profits more quickly. My attending many technical stock trading courses and even flying around the world to go to weekend seminars ended in disappointment.
In trading, the majority of people put their focus on better known technical analysis such as charting, in an attempt to use past price data to determine the market’s current position relative to where it has been in the past, as well as where it is going. Obviously, the most seasoned traders are aware that this pursuit is rather futile as you will rarely get anything more than 50% accuracy from observation of charts.
Trend lines were drawn subjectively, involving different pattern recognitions like head and shoulders, flags, pendants, support and resistance, Elliot Waves, Fibonacci lines, double tops, double bottoms, and so on. It seemed unbelievable that one is actually able to discern so much information in a chart and analyse patterns even when they don’t actually exist when you most wish to trade! This was who I was.
Additionally, there are tools of the technical kind such as simple moving averages, exponential moving averages, ADX lines, MACD lines, the RSI, Stochastics, William % R, and so on, which created even more confusion. If you don’t proceed with caution, all these tools can in fact act as a hindrance instead of a source of assistance, as it can create analysis paralysis as a result of the fact that a single tool refutes another and therefore you end up in a state of indecision.
Lastly, there is the camp called Macro Economic Analysis in which traders appear to look merely at economic data such as unemployment, interest rates, purchasing managers index, payroll data, consumer confidence, money supply, and fund flows, etc.
The reason I am able to give you all this information is because I have extensively studied and applied myself in all three camps described. Have you ever heard of the saying, “One does not know it until practiced in reality”? This applied to me over the years. I started with Fundamental Analysis value investment, then shifting over to Technical Analysis trading, and as far as proprietary day trading, and then changed over to Macro Analysis and exploring if it gave me the edge I needed.
I should probably explain why I jumped from one discipline to the next over the years.
The answer to this question is quite simply, my love of the craft. Another crucial factor was the Global Financial Crisis (GFC). The GFC altered the way I thought about investing and personally impacted me as I also managed money professionally.
At that point in time, my launching of a private Hedge Fund had already occurred, and I was looking after many family funds. We were performing quite well before the GFC. When the GFC occurred, however, our long-term portfolio including some of the world’s greatest businesses halved in value. This caused significant emotional pain, even though they weren’t permanent losses.
The experience of losing half of the portfolio of another person is very difficult. Luckily, none of my investors questioned the performance or decided to bail out on me.
The GFC’s positive effect was the fact that it propelled me to search far and wide for another way to do things, in addition to the fact that it made me more intently question all of my existing knowledge, and how I could boost my trading and investment practices and processes.
I asked myself what I am doing to ensure that there is an optimized balance between risk and reward, and whether I do actually enjoy what I am doing every day of my life.
I combined all three disciplines into my approach to investment and trading. This was an incredible leap, as it had a hugely positive impact on my short, medium, and long-term performance!
I did this through:
- Combining the Fundamental Analysis of companies, and thus trading or investing the market’s financially strongest listed stocks, then
- Using Technical Analysis to overlay this in order to create improvement of entry or exit, and to lessen risk, and then
- Used Market Analysis, which provides a ‘big picture’ of the current environment we are in. Market Analysis provides information with regard to whether or not you should be in the market, the level of success you can reasonably expect to achieve, and most significantly the drastic reduction of risk to accomplish your expected return.
Do not misunderstand me. I am very aware that there are wonderful pure value investors, as well as pure chart traders, proprietary tape reading traders, and macro traders who are able to achieve great success without creating any kind of combination of the three different disciplines. However, this is rare, especially with regard to the long term.
Remember that well in excess of 90% of fund managers are not actually able to beat the market index during a 10 year period. These fund managers are the pros! Think about what that implies.
All of this has been part of what I have learned over the past twenty years.
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