There is a school of thought in the stock market called technical analysis, where its practitioners believe that past price movements of a share can be used to predict future movements. That’s not something we do here at The Motley Fool though. For us, each share is viewed as a piece of a business. And each business has a value which can be reasonably estimated from a study of many of its different facets like its products, management team, future prospects, assets, and brands etc. This form of analysis is known as fundamental analysis. And for those who practice it,…
There is a school of thought in the stock market called technical analysis, where its practitioners believe that past price movements of a share can be used to predict future movements.
That’s not something we do here at The Motley Fool though. For us, each share is viewed as a piece of a business. And each business has a value which can be reasonably estimated from a study of many of its different facets like its products, management team, future prospects, assets, and brands etc.
This form of analysis is known as fundamental analysis. And for those who practice it, a share stands a high chance of becoming more valuable in the future if its price happens to be below it business value.
I personally am in the fundamental analysis camp. But, I can see why technical analysis can be so entrenched in the way many stock market participants buy and sell shares. Technical analysis has simple and easy instructions such as “buy above this line” or “sell if it hits this other line.” In comparison, the study of a share’s business can be a lot more mentally draining and subjective.
Trying to have your cake and eat it too
And then, there’s another group of investors who believes in both. They would study a share based on its business fundamentals but then attempt to time their purchase for maximum effect through the use of technical analysis.
These group of investors are what I call the kiasu bunch. Kiasu is a uniquely Singaporean and Malaysian term that’s generally used to describe people who have a big fear of losing out. So in this sense, investors who embrace both technical and fundamental analysis do so for fear of losing out on the benefits of both – they would like to have their cake and eat it too.
I’m not here to prove whether technical analysis does or doesn’t work. I’m here to show why the kiasu investors – those who use both technical and fundamental analysis – might be doing more harm than good for their portfolios.
Too many ingredients spoil the broth
In a similar way to cooking, investing is about finding the right ingredients to make the perfect broth which suits our taste.
Sure, when we learn about a new ingredient, we’d love to experiment and test it out. However, putting everything we know into a soup will only spoil it rather than make it taste better.
In the stock market, the investing time horizons for fundamental analysis and technical analysis are very different. The former focuses on the long-term, over multi-year periods. Meanwhile, the latter is more for trades done over minutes, days, weeks, or occasionally, months.
Imagine: You have decided to buy-and-hold a company over the next decade based on your study of its business fundamentals. But at the same time, you are also constantly faced with technical indicators blaring out that you should sell the company. This kind of push-and-pull can end up being a major distraction rather than a useful tool and may eventually cause you to forget why you have chosen to invest in a certain company in the first place.
“Simplicity is the ultimate sophistication” – Leonardo da Vinci
The quote above is one of my favourites and it says it all. Sometimes, we have to be decisive and confident in what we believe in and choose a simpler route.
I am not saying that fundamental analysis is the best or that technical analysis is useless. All I am suggesting is that we choose our path. If you believe that technical analysis is the way to riches for you, then all the power to you. But only by being focused – and in the process achieve simplicity – can we become better investors.
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Stanley Lim doesn't own shares in any company mentioned.