Friday, September 21, 2007

Fundamental VS Technical Analysis

There are two main ways of picking stocks (or any kind of investment).

Fundamental analysis is concerned with looking at the economic fundamentals affecting the particuar stock (etc) and covers everything from the economy it operates in (interest rates, unemployment, exchange rates etc), through sector prospects (is the sector growing or declining, the competition etc) down to the particular stocks accounts, and management team.

On the surface it seems fundamental analysis provides a reasoned and rational basis for investment decisions. The problem is that the information youve based your analysis on (plus that you missed) is also available to everyone else - including the smartest pro traders and analysts, their super dooper computer models, and the inevitable snippets theyll discover that you wont. Result, by the time youve done your fundamental analysis your findings (plus the stuff you didnt take account of) is already reflected in the price.

Technical analysis is concerned with (dont laugh) trying to guess future price movements by looking at historic price charts. In theory this would seem about as useful as trying to guess price moves from studying tea leaves. Technical Analysis is dismissed as useless by academic, author, and succesful investor Burton Malkiel (A Random Walk Down Wall Street). And yet the fact that technical analysis is still widely used might just make it a proverbial self-fulfilling prophecy; ie a technical buy signal occurs, lots of people buy, the price goes up Though I suspect such a thing - if it exists - works only in the very short term.

Ultimately, the safest bet is simply to buy an index via a low-cost tracker fund, and thats where your core investments should be. Either in a managed fund, or (if you can afford it) in a broad spectrum of diversified stocks.

But if you want a bit of fun, with non-critical money, do your fundamental analysis, do your technical analysis, but leave the final choice to that little voice within - your intuition.

Johnny Finnis is editor of, a simple and unbiased introduction to finance and investment for ordinary people to make the most of their money. Have your say on our blog