Fundamentals & Technicals: The Best of both worlds

Apurva Sheth
Last time I left you with a thought:

Prices are determined more by the attitude of market participants to the emerging fundamentals than by fundamentals themselves.

Now let us break this statement down for better understanding.

"Prices" - refers to the price of all financial securities like equities, bonds, currencies and commodities

"are determined more by" - will be affected 'more' by (and not only by)

"the attitude of market participants" - market participants refers to everyone who is 'in the market' buying or selling securities at a given moment, plus everyone who is not in the market but might be if conditions were right. This means the stock market is potentially anyone with personal savings. All price movements in stock markets is attributed to these people's attitude. And that is a result of their collective emotions and psychology. Two primal human emotions which rule the financial markets are fear at one extreme and greed at the other.

"to the emerging fundamentals than by fundamentals themselves" - people's perception of the fundamentals supersedes the actual fundamentals.

Many misinterpret this and think that fundamentals of a stock are not important for the price.

No! that's not the case. Fundamentals will always remain important for the stock. But that is not what a technician is bothered about.

Fundamentals are the cause and price movement is its effect.

Technicians believe that the effect is more important than the cause, and so devote more of their time studying price action over other things.

We have already seen that there can be numerous factors affecting stock prices. And ascertaining the extent of their net impact on stock prices would be very difficult for an individual investor. So it makes sense for you to devote some energy to study price action.

I often see my friends or colleagues getting into an argument over which one is a better approach while making money from stocks - fundamentals or technicals.

I think the whole argument here is flawed.

It should be Fundamentals and Technicals rather than Fundamentals v/s Technicals.

Why should we accept one and reject other. When we can have the best of both.

A marriage of both will work wonders. In fact, I believe in combining both and bringing the best of both worlds together.

One strategy which I follow during the quarterly results season is keep a track of stocks that are coming out with good numbers. Once the initial frenzy is over, these stocks normally consolidate for a while. I look out for opportunities when such a stock in "consolidation" phase could breakout. This approach enables me to get into a fundamentally strong stocks at the right moment.

I would take it one step further from there and also like to apply technical strategies on fundamentals.

Yes, you read it right, Technical Analysis of Fundamentals. Sounds Interesting, isn't it?

Any approach which may tell you with a high degree of confidence about the likely future of the market shouldn't be neglected. And technicals definitely help you with that.

In the meanwhile, I would like you all to go through this quote and think about it...

"Our youth now love luxury. They have bad manners, contempt for authority; they show disrespect for their elders and love chatter in place of exercise; they no longer rise when elders enter the room; they contradict their parents, chatter before company; gobble up their food and tyrannize their teachers."

Now, whether you agree or disagree with this, you are probably wondering what this quote is doing on a page that talks about technicals and money making! Well, I can assure you that it is exactly where it should be.

Wait for my next letter, in which I share with you more about this quote, it's relevance to our context, and most importantly, take you further in our journey with technicals...

Have you ever combined fundamentals & technicals? Share your views in the Club or share your comments here.

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14 Responses to "Fundamentals & Technicals: The Best of both worlds"
y m patel
21 Feb, 2015
thanks to Mr. Apurva Sheth for such fundamentally sound and technically strong of various stock. It is bit difficault to trace such stock in such bull market but you done it successfully,best wishes for same in furture.Like 
Kamlesh Mehta
13 Dec, 2014
Excellent thoughts, rare clarity. I am completely on board with this approach and practice it. Damadaran has clearly distinguished Price V Value. Price will move below or above the Value which itself is changing. Thanks. Like 
gowree
03 Dec, 2014
I fully agree with your views. To get correct entry point use point and figure method after studying fundamentally sound stocks with goos quartely result .Like 
Rajat Bose
01 Dec, 2014
Nice post, Apurva. Also, to Equitymaster I would like to say a la Apurva's use of quotes, "You have come a long way, baby."--from the days of strictly fundamentals and at best a mixture of macro factors when technical analysis was a heresy to its current embracing of the methodology is definitely a remarkable journey from a dogmatic approach to a pragmatic one; well, someone could say eclectic. Anyway, whatever suits us best to achieve our goal of investment and/or trading success is welcome. Now, Apurva, I agree with you in your rejection of the fundamental v/s technical false dichotomy. The one who knows how to combine the two effectively gets the both the cake and the icing on it as well. All the best wishes for you and Equitymaster.comLike 
Raviraj
30 Nov, 2014
Hi Apurva, I completely agree with you. By applying Technical Analysis on Fundamentally good stocks we can able to time & exit entries. Though many don't accept Technical Analysis is because they are too biased in Fundamentals or not willing to learn the art of Technical Analysis. It is up to the invidual's preference on what works best for them. Like 
rajendra
30 Nov, 2014
nice articlesLike 
P. A. Kishore
30 Nov, 2014
While I completely agree with your approach, I think the quote in question is perhaps thousands of years old observation of some Chinese philosopher/writer and I guess you intend to hammer on the point that "history repeats" by pondering over the quote in context of Technical analysis of Fundamentals!!Like 
Dipakkumar
30 Nov, 2014
Your quote is true and I agree with the present attitude of the youth in almost 99% cases. The main factor behind this is the ' bloated ego' of every individual who are highly educated by obtaining qualifications and degrees to earn maximum salaries. They do not have the practical experience and the knowledge to deal with critical problems in their daily life in relationship with their elders, peers, subordinates, neighbours and the common people.Like 
ravindra javali
30 Nov, 2014
This is the approach i am using for my investment. I pick stocks purely on fundamentals and study the technicals of them and enter at appropriate time and also exitLike 
Nirav Doshi
29 Nov, 2014
Very good article. But my view is little bit vary with your article. If you are trader then applying technical to fundamental story is very good, even great idea. But if you have longer horizon investing and believe in long term story then every price is reasonable to invest. One thing I must say that there must be discipline in applying any strategies. Happy Investing and keeps on writing. Like 
Sharad Narvekar
29 Nov, 2014
For along term investor fundamentals r important . In the long run short term flactuations does not matter MUCH . Like 
R.S.Narayan
29 Nov, 2014
First select fundamentally sound stocks for long term and trade 20% of them using technical analysis.The chances of making wealth will be highly enhanced. NarayanLike 
Vijay Kumar Gupta
29 Nov, 2014
Great to see such an article. I too prefer fundamentally sound stocks that are in strong uptrend or are ready to begin an uptrend. Keep it up. Hope you shall share such stocks in your articles. Regards. Like 
M M Amalsadvala
29 Nov, 2014
A good one from a young mind - Mr. Apura Sheth, keep it coming. ThanksLike 
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