Wisdom of Investing | Technical Analysis & Fundamental Analysis | Education & Learning About Investing

Wisdom of Investing - Investing wisely, for the beginner means that certain basic knowledge must be accumulated before making any serious decisions. One must learn and understand certain terms related to investing, for example with the stock market, terms are used such as, capital, capital growth, income stream, price-earnings ratio, dividend yields.

With regard to investing money in a bank account, terms such as, Certificates of Deposit (CDs), compound interest on accounts, fixed or variable yields on interests rates, to mention a few.

For the individual who plans to become a successful businessperson, the facts must be faced, that the Management of Money is just as important as possessing a trade skill, negotiating a good purchase or sale, or perhaps being able to motivate and manage people.

It is recognized by many of our clients that considering taking a degree in economics or statistics is normally out of the question. Most however have been committed to undertake research into the basic pattern observed in the world of business, such as inflation, input costs, return on investments. Fortunately many down-to-earth publications exist and we mention just a few used by our own management.

These or similar books are available from most major bookstores or online.

Should one use Technical Analysis (charts) or just use the Fundamentals when buying and selling shares? There is some wisdom and merit by hitting a balance between the two. (The following report was submitted by the financial editor of "Personal Finance" in Cape Town, South Africa.)

Technical analysts are stock market wizards who claim their share price graphs have amazing predictive value. They claim history repeats itself in the stock market and that patterns can be discovered and used to predict a share price's next move.

For example, a 20-year graph that also contains moving averages and volume data is a magnificent summary and representation of thousands of transactions. This is a depiction of the daily supply of and demand for the share and it is completely objective. Many patterns and price consolidations seem to repeat and a careful study can give some idea as to the volatility of the share.

Fundamental analysts pooh-pooh technical analysis as a lot of hocus pocus. They claim that the only theoretically defensible way of valuing stocks is the discounting of forecast cash flows. Technical analysts would counter by arguing that future cash flows cannot be reliably determined in any event, and given the accounting and management corruption in business these days, this is a fair point.

The most devout of technical analysts lock themselves in tiny dusty rooms, board up the windows and carefully study their charts. Speaking to management teams and visiting factory plants, forecasting cash flows and phoning analysts is just a waste of time for them.

A typical technical analyst will emphasise the following:

My biggest problem with this is that I don't know of any very rich and famous technical analysts, while it is not difficult to think of many successful fundamental analysts and long-term investors. As in all things, I think it's important to find a balance.

When you study a graph, you are less likely to be distracted by the collapse of the Russian empire, Saddam and Bin Laden, interest rates, American foreign policy, Israel, Enron, or the fact that core earnings on the S&P 500 still reflect a price/earnings ratio of 50 times. It is a great filter mechanism because, let's face it, if you concentrate on all the problems facing the world today, who would want to own shares?

On the other hand, you will never understand the business economics of a company and its strengths and weaknesses by simply studying a graph. This is where technical analyst die-hards miss the point. Investors today need to use every technique and resource available to them, including technical and fundamental analysis.

But remember, although these graphs may not look like the Mona Lisa, a picture is still worth a thousand words and once all the fundamental research has been carried out, a share price graph remains a most valuable tool to assist investors in timing their purchases.

Editor's Note:

(1) We asked one of our associates who is a technical analyst, this question. Is this risky? His answer was, "In anything you do there is risk, especially in the markets. However our priority at TradersEdge is to protect you as much as possible from losses by consistently finding stocks with recognizable technical patterns, low-risk entry points and a sell discipline on each and every stock pick we recommend. There will be losses along the way and thinking otherwise would be unrealistic. By employing a highly disciplined and unemotional sell discipline, we are able to limit our losers and let our winners run." If you wish more information on this subject contact us

(2) This quote from the "Big Trends Newsletter" by Price Headley also sheds some light on the difference between Technical Analysis and Fundamentals investing, "A purely technical trader looks for price breakouts, then takes a position in the same direction as the trend. By the very nature of his method, though, the reason for the breakout is not considered. Does that matter? Certainly. Stocks only move higher when the demand for those shares increases."

But if demand for shares can increase without reason, then demand can also drop without reason. That, of course, pulls share price down and the technical trader may end up giving back his or her profits. A technical trader who realized that a price move occurred without any reason may have also foreseen that the price move was not sustainable. On the other hand, strong fundamentals don't guarantee a return of any size to a shareholder. Remember, you only make money on a stock if the per-share price increases, and prices are set by the supply and demand of the market - not the company's performance."

In that case, the technical trader would have an edge by only getting into stocks that were actually headed higher. But what if you applied both techniques? A trader who finally saw share prices break above key resistance after a company posted improved earnings would know two important things. First, share prices are actually moving higher, and second, the improved fundamentals will attract other investors, making that rally sustainable."

(3) While not a method of 'predicting the future,' as often believed, technical analysis measures probabilities, identifies 'buy' and 'sell' signals, and minimizes risk. That is why serious traders and professional investors frequently look toward technical analysis as a valuable trading tool.

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Education & Learning About Investing

• One very important lesson that is of primary importance is adopting the Right Attitude Toward Investing, especially when related to the stock market. For a synopsis of what this means to the average investor. read more

• This section of our website is primarily targeted toward investing in stocks and shares, although we currently research other sound investments such as property, art, stamps, antiques, and we shall occasionally highlight new and reliable information which comes to our attention. Visit our web page on Investments

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