Most people are of the firm opinion that FA is for investing and TA is for trading and the two shall not mix. This is also repeated often enough to have, by now, made it an image in the minds of people. Over the last few years I have been engaged in designing a model for Technical Investing and I am quite happy with the way it has turned out. For those who might be sceptical about what I am saying a few words of my perspective.
Two approaches, basically, to investing- top down and bottom up. I would wager that less than 10% of all the people involved in investing actually know how to estimate Economies followed by estimation of Industries. They just don’t have the capabilities for it nor do they have the kind of data to do this. So essentially, the only people who may be doing a top down approach would be some large institutions. The rest are all doing bottom up variety. I believe this is where TA and FA coincide. TA is very efficient in doing bottom up variety analysis. Difference is in the details. But if we know how to structure TA to address months rather than days, then the issue of remaining in the stock thru its upward move would get solved.
In this context, something that I read a while ago is worth mentioning. In an article that lauded long term investing and spoke against timing the market, the author Ibbotson says “Missing out on those high-return months (the timing of which you can’t predict) can cost you a lot. A hundred dollars invested from 1926 to 2006 in the S&P 500 would have yielded $307,700,. But if you missed the 40 months with the highest returns you would have ended up with – no kidding – $1,823 only.” I am thinking here that if the returns of 80 years (1926-2006) were dependent so highly on 40 months, then what I should really be doing is to concentrate on finding a way to narrow it down to those 40 months! Now, it is debatable whether it is predictable or not. The author assumes that it is not. But he is not the last word on the subject, right? The only thing he can state, perhaps, is that he cannot predict it. So what’s left for him is to remain invested throughout. That is one way. But I would rather take my chances with finding a way to be invested for 40 months (or thereabouts) rather than 80 years (come on, who even thinks like that??) to get that return!
Another way could be to structure a technical model that will point to the times when the stock is showing its best out performances. Using TA precepts, we have designed models that help us with the bottoms up approach, We can select stocks, segregate them into different grades of performance, set up criteria to detect when those performance standards are changing (for better or worse) and finally, create a model that will keep us invested in the stock all thru the time it is trending with gusto. In and thru this, we integrate the news breaks, the quarterly results, industry developments to the level that we understand it (which may be limited, as is the case with almost all individuals). This integration also needs a certain process and the one I follow is to see the reaction of the stock to the news rather than the news itself. The market is a much better analyst than the best of the analysts who are at work. So why not listen to the best interpreter of news and events rather than waste your time with someone’s interpretation that may possibly carry the bias and emotions of that individual?
This approach has helped me design an Investing model as well as a Wealth Builder model (for the multi bagger stocks). The elements for all these are available in the contours of TA and it is only necessary for us to put it together properly. And then to follow its dictates, one of the most important of them being “Don’t trade your investments”. This is an important lesson learnt along the way and it is what most people feel that those following TA are incapable of doing. The truth of any matter is that we are all infinitely capable of doing whatever it is that we want to do. But we end up doing what we choose to do.
Images are created and perpetuated by those who have a different agenda. The weak will fall prey to them. Every profession has a variety of areas where its proponents can practice and hope to flourish. Finance professionals are no different. Technical analysts have greater freedom with their format to be whatever they want to be in the market- trader of any time frame, advisor to any type of trader, investor of any time frame. It’s all in the choices that he or she has to make.