Two weekends ago, my husband and I, along with a few friends, went for a dinner/cruise in Toronto harbor. The evening was nice and warm, the boat we were on had a really great chef, (I checked in advance, I take food very seriously), and our friends were in a great mood. Everything still felt “summery,” if only it were not for running into my former boss.
When I worked for him, he was a head trader at a small institutional shop on Bay Street, and now he runs a very successful . It was great seeing him, don’t get me wrong, but with him, you just cannot avoid shop talk, even on a weekend, on a dinner cruise, while enjoying one of Toronto’s warmer summers on record.
As fate would have it, none of this stopped my boss from waking me up from my summer reveries, throwing at me a few names, mostly Canadian companies, and talking about charts and technical analysis.
You see, my old boss never cared much about fundamentals, earnings guidance, or that sort of stuff. He used to say that these days, fundamental analysis holds as much forecasting power as a crystal ball. Securities laws require that all material information about a company be disseminated as soon as practicable, which means that both the Street and ordinary investors find out about recent fundamental developments at the same time. So, what’s the point in getting the same info along with everybody else?
Mind you, fundamental analysis is important, but there are numerous things that could make that information appear flawed. For example, a company’s management could be into something I like to call creative accounting. Or, the fundamentals provided may contain one-time revenues that are not likely to be repeated in the next quarter, thus providing for misleading earnings potential. Or, whatever may be going on with a company’s fundamentals may have nothing to do with what is going on within a sector. Plus, you may never know what other inherent issues the company may be facing.
So, what is there left to use in this day and age of more or less free information flow that still has some forecasting juices left? Well, according to my old boss, hardly anything works better than the good, old technical analysis. Well, I should say a good, modern technical analysis, the kind that has emerged from the quantitative analysis.
The main premise here is that a good technical analyst refuses to get sucked into a company’s “story.” This is of paramount importance. You see, when a forecast turns sour, a technical analyst is typically more inclined to sell the stock. Unlike a fundamental analyst, who may feel bound by the “story,” and justify holding onto a loser with a strategy called ‘averaging down,’ claiming that the stock is now discounted.
The only problem with this approach is that a discounted stock should not be equated with an undervalued stock. These are two entirely different “animals,” and not knowing the difference could cost you serious money.