Fundamental analysis vs Technical analysis

The information in this article is market commentary only and reflects Lincoln’s views and beliefs at the time of preparation, which are subject to change without notice. To obtain up-to-date information, please contact us.

In this article, Lincoln Indicators discusses:
– Both approaches, Fundamental and Technical analysis.
– Which method is the best to apply?
– How many investors incorporate the two successfully using Stock Doctor

Which method is best and can the two work in tandem?

In share market analysis there is often a keenly contested debate between investors over which form of analysis is the best way to identify investment opportunities.

At Lincoln we are experts at Fundamental Analysis which involves assess the underlying quality of a business in order to assess whether it is an investment opportunity. This method has yielded exceptional long term performance for our members and we firmly believe that without understanding the fundamentals of the companies you are invested in you are setting yourself up for failure.

Technical analysis

There is another popular school of thought though known as Technical Analysis and it too has a large following. Technical analysis is a method of assessing whether a company is a good investment using historical trading data such as the stock’s price and volume.

Proponents believe that the current market price already reflects all the information available in the market. The main assumptions of technical analysis are:

  1. The market discounts everything;
  2. price moves in trends;
  3. investor psychology manifests in the chart; and
  4. history repeats itself.

Technical analysts then believe that the future price of a security can be deduced by looking at the charts and the trends and formations that appear. Unlike fundamental analysis, where the basis of under and overvaluation is relative to the calculated ‘intrinsic value’, the basis in technical analysis is relative to its historical trading averages and trends.

So which is the best approach?

Lincoln believes that when creating your investment portfolio, fundamental analysis must first be applied in order to ensure you are focusing on selecting superior shares. It is important to remember at this point that a share represents part ownership of a company. A company that operates on a daily basis, generating revenues through the sale of goods and services, pays expenses and wages from that revenue, operates within an economy and ultimately is there to generate a return for shareholders who have invested in the business.

Given that fundamental analysis performs a detailed study on a company, including its financial health and growth prospects, and does not rely solely on price and volume movements, fundamental analysis ensures that we are investing in a pool of quality companies. These are shares that offer us peace of mind because we would not mind holding them should sudden unexpected shocks, like the recent global financial crisis, occur again.

Can the two co-exist?

With both fundamental and technical analysis approaches enjoying support from a wide variety of investors, a settlement on the debate between the two will likely never be reached. What we need then is simply to understand both methods to determine which is suitable for us.

Some Stock Doctor members do apply both methodologies and what is not disputed among them is that Fundamental analysis must come first because technical indicators are far more reliable on great companies whereas on poor companies they are more ‘hit and hope.’

At the end of the day, where is the support level for a bad business? What resistance does a great business face? And if today’s great company remains a great company tomorrow then the share price will look after itself.

How do Stock Doctor ‘technical analysts’ use the program

Many “investors” choose to implement one strategy or the other. However a growing number of investors, including some Stock Doctor members, believe that both approaches can be used together to maximise returns. Fundamental analysis is best used for share selection, while technical analysis can sometimes help time an entry into, and exit out of, the market.

So by using our Star Stocks or through running a scan using Stock Doctor’s powerful Stock Filter, members can easily identify a selection of fundamentally superior businesses within seconds to work from. That list can then be saved within the Stock Doctor Charting Tool so that a member can apply their various technical overlays to identify which of these fundamentally great businesses warrants exposure.
Once a member has purchased their shares they simple input the purchase into the Portfolio Director within Stock Doctor. Their portfolios too are replicated in the Charting Tool allowing them to run their technical indicators regularly to insure adherence to their rules. Though remember, volatility creates opportunity for quality businesses and if implemented incorrectly, selling out based on a technical stop loss can leave you holding a can full of regret.
A membership to Stock Doctor will give you:
• Access to our fundamentally strong Star Stocks, which have consistently outperformed the market and are a great base to work from.
• The ability to seamlessly apply both Fundamental and Technical analysis all within the one program.
• The most powerful fundamental filter in the market to identify hidden healthy gems.
• A detailed charting program which include +150 indicators and a detailed scan tool.
• Detailed education and support on all features including an investor can combine the two methods should they wish.

Our team is always here to help. If you would like to discuss this article in more detail or would like more information on Stock Doctor or our Managed Investment Solutions, please contact us on 1300 676 333.

Tim Lincoln
Managing Director