<<I am perfectly willing to look at the other side of the coin here. In fact, this is a dialogue that is long overdue.>>By stating your opinion on the front page and burying the discussion of it on a message board, you are not so much engaging in a dialogue as a monologue. If you are truly willing to look at "the other side of the coin", allow the other POV to obtain the same amount and degree of publicity.Over lo these many years, no Fool of whom I'm aware (at least none who has lasted any length of time) has been interested in a serious debate on the issue of technical analysis, perhaps because of a deep-seated conviction that it's all hokum.If you yourself are genuinely interested in exploring the issue, let me know at the CANSLIM board. Otherwise the end result of any discussion will be the same that it's been all the years since the Compuserve days, which is essentially that the results one achieves by virtue of investing based solely on fundamentals is superior to that which one achieves by virtue of investing based solely on technicals or some combination of the two.--Db
By stating your opinion on the front page and burying the discussion of it on a message board, you are not so much engaging in a dialogue as a monologue. If you are truly willing to look at "the other side of the coin", allow the other POV to obtain the same amount and degree of publicity.Our discussion boards are quite popular and as such I disagree with your contention that the topic is being "buried". Furthermore, it has happened too many times to count that substantial information brought to light through the boards has susequently been shared in follow-up columns by TMF writers.There is also the opportunity for a well-written post to be noted as Post of the Day. Agreement with Foolish authors or principals is not a prerequisite for being selected.If you yourself are genuinely interested in exploring the issue...I am. I've recently finished reading A Random Walk Down Wall Street. He cites studies that throw doubt on the abilities of technical analysis to beat market averages over the long term. (He's not crazy about fundamental analysis either.) Do you have citations of studies that suggest the superiorty of technical analysis? I'd like to see them.Also, I'm curious as to your opinion of Bill Mann's assertion that wide spread usage of useful technical indicators would destroy any effectiveness. (This is something that was often debated on the F4 board.) Do you agree?If so, then why would you want to convince anyone else of the usefulness of technical analysis?Fool on! Phool off!Joseph RichardsonTMFPhool1@aol.com
I've already responded to TMFOtter in re this subject, so if you're interested in the details, perhaps he'll share my response with you. He has my permission to do with it what he will since email is public anyway.You do raise a point, however, that I should address. One is that a discussion on a message board is equivalent to a homepage op piece. This is no more true than claiming that a bit on page 14 of the Style section has the same impact and readership that an above-the-fold frontpage headline has (remember the authors of the forty-year-old single woman/attacked by a terrorist probability study who decided later on that none of it was true?).Message boards are indeed popular. But ten posts in a week is not likely comparable to the number of eyeballs which viewed the piece which prompted my post.I responded to Otter's interest in a dialog, but I have no interest in engaging in such a dialog on a message board. I don't have the time (except for a few posts on the Gorilla Game board, this is, in fact, the first post I've made off the CANSLIM board). Therefore, this will be my last post on the subject (and please, no emails).If Otter does copy my response to his email here and anyone has questions about it, they are welcome to ask at the CANSLIM board, which is the only board I have time for. But since he emailed me privately, he may wish to keep our exchange private, which is perfectly okay with me too.Hope everyone has a lovely weekend and life.--Db
Bill, Just read and enjoyed your post which, if I get you right, hinted at morcel of TA as a possible ingredient to a foolish philosophy, and I wonder whether I wouldn't become "slightly" addicted to that sort of extra spice.I'm basically of LTBH state of mind, started in March this year. I haven't done too well as you can imagine .. (has anyone?) but don't feel too bad at a mere -35% to date. I hold some of the patented innovators and the cash flow kings, aka gorillas or something jungle-like. Funny thing though, just for the wierd craving sensation of looking at my port and following a bunch of great stock in a market supposedly returning to the mean, I get a very good feeling of when they're going to bounce back up again. That's when I start getting really scared that I'm going to miss the boat and things'll might rocket to the moon the next day ... and you know what ... I knew I should have bought and made up for some losses. At the end of the next day I know they're going to go south again and you guessed it, they darned well do and that's when I would have sold. This is great, feeling you know what the market is going to do next and doing nothing! But hang on, before I get besotted with this new-found confidence, I'd like to know if this "easy money" is what everybody is really after? Is a one-shot bull's eye what investing is about? Surely it has another name hasn't it? I wonder how many normal, greedy guys could get uncomfortably addicted to this sort of easy money?TA and day trading the gorillas of this world isn't going to help anyone in the long run is it? It sure is becoming a popular fad and I wonder if the markets will prosper as a result. Perhaps TA activity is a seasonal thing and I'm just too chicken to take the plunge. Ideally I'd like to be able to understand the tools to improve my BUYING. If I can accomplish that I'll go back and learn about selling. Thanks, I enjoy your postsRob
I wonder whether Bill Mann would consider William O'Neil (sp?) a technical analyst? I realize that he does consider fundamentals when deciding WHERE to invest, but he consistently stresses how important it is to use TA to decide WHEN to invest. Also, his reliance on RS and his "sell when you've lost 8%" rule are both examples of the "stocks in motion stay in motion" theory that Bill Mann pooh-poohs. It seems to me that Mr. O'Neil should certainly be considered a successful investor who uses technical analysis.I admit to knowing little about technical analysis -- and I do have to agree that a lot of it seems like reading tea leaves -- but I am considering trying to use more of O'Neil's ideas for future investments.Finally, I think TMFPhool1's response to the first post in this thread was a little harsh. Why not get a TA enthusiast to write an "op-ed" piece on the topic? Heck, if the Washington Post can carry George Will and Michael Kelly, certainly the Fool can print some opposing viewpoints as well... ;-)Tom
The biggest flaw in TMFOtter's article (as well as implicit in Train's buffoonish bet proposal) is that technical analysis is predictive. Unfortunately, the vast majority of TA critics, as well as many TA practitioners, cannot wrap their brains around the fact that TA is NOT a predictive tool, it is a descriptive one.I have never looked at a chart with the thought that I could somehow predict where the stock would be in a week, month or year. Nobody can do that.I can only see whether a stock is being accumulated or distributed and whether it is close enough to support/resistance for me to make a trade with an acceptable risk/reward ratio.TA is simply an effort to better calculate the odds so that you only place your bets on situations which you believe are most favorable to you.This must be combined with an effective money management strategy (which is probably far more important than the TA element of any trading system) to be productive.When a player counts cards in blackjack, he does not do so to predict what the next hand will be. He does so to constantly recalculate the odds based on the most recent hand(s) dealt so he then knows how to adjust his money management system.TA attempts to do the same thing in the stock market. It is certainly reasonable to argue about whether TA is effective or ineffective in doing so.But as long as you are hung up on the notion of TA being "predictive" there can be no useful discussion on the topic.Those who label TA advocates "tea leaf readers" simply lack an adequate understanding of the approach.To me, the buy and holders who look at things like balance sheets and income statement are the "tea leaf readers."Me? I'll never pretend to have even the faintest idea of where the market or any stock will be next month or next year.I don't think it's possible to predict the market. That's why I use TA. -chris
You do raise a point, however, that I should address. One is that a discussion on a message board is equivalent to a homepage op piece.I never said it was equivalent. I responded to your assertion that the topic was being buried by referring people to the boards. I simply don't believe that is true and I offered a reason or two for my position.Fool on! Phool off!Joseph RichardsonTMFPhool1@aol.com
AngryCandy, that was probably the best response that could have been made about TA and the proper use of TA. The average investor does not have the contacts nor the research teams available to the big guys. You cannot compete with them on FA because they and their resources will always be ahead of you. TA at least lets you take a peek at what direction they are heading. I use TA almost exclusively for making buy and sell decisions, I use a very strict set of criteria (FA) to screen the companys that I make buy and sell decisions about.
Unfortunately, the vast majority of TA critics, as well as many TA practitioners, cannot wrap their brains around the fact that TA is NOT a predictive tool, it is a descriptive one....TA is simply an effort to better calculate the odds so that you only place your bets on situations which you believe are most favorable to you.And yet the studies cited in Random Walk suggest that TA does not provide any advantage over chance to beating the market averages. So would you say this is this because the studies didn't sufficiently screen investors? (I don't know the conditions for selection that any of the studies used.) In other words, in your opinion would an appropriate study screen out anyone who claimed the "predictive" benefits of TA because they were using it for the wrong reason? Or let's say without the right kind of suplemental (dare I say "fundamental") information?Fool on! Phool off!Joseph RichardsonTMFPhool1@aol.com
I am a new investor trying to invest with a LTBH philosophy. While I still believe in the LTBH approach, I feel that the criticisms from the TA side regarding the foolishness of riding the heavy loses all the way down this year have some merit. I don't have time to learn how to do in depth TA, so here is my comprimise: 50% invested in stocks picked by FA and for LTBH, and 50% invested in Spiders which will be bought at "market bottom" and sold at "market top" as defined by Bill O'Neil. In this way I will limit the number of individual stocks that I pick to 4-5 which will be a small enough number to be extremely selective on fundamental principles, and really follow in depth on a continuing basis. William O'Neil's method for spotting market tops and bottoms is quite simple, and doesn't require much time. Each of us must find our own comfort zone in combining FA and TA. More discussions on this topic would be worthwhile, here at the Fool.Becky
Technical vs Fundamental Investing techniques: The prudent investor must use both. It is stupid to buy or sell anything without having some idea of what the value or your sale or purchse may be. This is true in real estate, automobiles, yoyos and stocks and bonds.By reviewing a company's past performance and as well as expected future performance an estimate of value per share can be deduced. Projecting ahead these same kinds of data, future values and therefore rates of return can be estimated. This sets up basic criteria for limitting the selection process.Technical analyes is best used for timeing in the short time horizon in a bull market, and TA comes to the forefront in a bear market (the only time values are expected to depreciate against long term patterns).My portfolio consists of established long term holdings that I never touch regardless of the market, and short term holdings especially in a bear market where I may wish to short to offset temporary losses in long term holdings as well as make additional profits.
<<And yet the studies cited in Random Walk suggest that TA does not provide any advantage over chance to beating the market averages. So would you say this is this because the studies didn't sufficiently screen investors?>>The things I have to say about Random Walk would be censored by the good folks at Fool HQ. :)<<.) In other words, in your opinion would an appropriate study screen out anyone who claimed the "predictive" benefits of TA because they were using it for the wrong reason? Or let's say without the right kind of suplemental (dare I say "fundamental") information?>>As a die-hard skeptic and devotee of the scientific method, I respect those who question TA. It is a very thorny issue and I honestly cannot think of a fair way to empirically analyze the result of "technical analysis as a whole." This is simply because the potential returns from employing technical analysis are so intertwined with the money management technique as well by the trader's own personality that I don't think it is possible to isolate "Technical Analysis" the way one can isolate, let's say, certain mechanical investing screens.I realize that sounds like a cop out but I would also say that the same thing applies to the buy and hold approach. If you were to ask the question "Does the long-term buy and hold of individual stocks approach beat the market?" exactly how would you answer it? I don't know of any way to do so. It depends on which stocks. And for how long. And over what historical period.I suppose one possible test for TA that would have some empirical validity is simply to find individual traders who employ TA and have beaten the markets consistently enough and by a large enough degree that their returns cannot be explained by chance variation.I don't think the question "Does Technical Analysis beat the markets?" can be answered any better than "Does buy and hold beat the markets?" We can only look at the returns of individual traders, see who, if anyone, has beaten the markets consistently and find out how they did and how much of that outperformance was attributable to chance.-chris
Hate to rain on the voodoo campfire, but Technicals are for short term reactive tendancies 1-6 weeks and "buy and hold" is not. To poo-poo technicals by limiting them to either one week or or ten minutes and to give warren ten years with quality only is a no brainer. Warren wins. but give the Tech. guy 12 screens, a masseur, dieticion, spa, and the now available t-3 speed, with 12 screens, an assistant and a similar staff to Warrens' and 100 million to leverage based on reams of colated information allowing holds of 3-5 and 12 weeks and 3 years run....Warren loses.... Assuming Warren & Corsortium, isn't n manipulating the market....but that's another story.
: aavery Number: of 5738 Subject: Re: Is Technical Analysis Voodoo? Date: 1/5/01 8:58 PM Post New • Post Reply • Reply Later • Create Poll Problem Post • Recommend it! Recommendations: 0 Hate to rain on the Voodoo campfire, but Technicals are for short term-reactive tendancies 1-6 weeks and "buy and hold" is not. To poo-poo technicals by limiting them to either one week, or or ten minutes and to give Warren ten years with quality-only is a no brainer. Warren wins. but give the Tech. guy 12 screens, a masseur, dieticion, spa, and the now available t-3 speed, an assistant and a staff similar to Warrens' and 100 million to leverage based on reems of colated information allowing holds of 3-5 and 12 weeks and a 3 year run....Warren loses.... Assuming Warren & Corsortium, isn't n manipulating the market....but that's another story.
Doesn't the Foolish Eight use IBD's relative strength numbers as one of their criteria? The relative strength number is pure TA, having nothing to do with any fundamental characteristic of the security.This makes me think that I am seeing: "My TA is good, yours is questionable and his is definitely Voodoo."Does the word hypocrisy come to mind?
I think your comments are insightful and correct (please see my post tonight regarding technical analysis). I use charts as a guide for purchase (and sale) in conjunction with fundamental analysis. If a company looks like something I want to own, the charts help me find an acceptable risk/reward point to buy (or conversely, to sell). Often, I like a stock on its fundamentals as an investment, but, based on the chart picture, the risk/reward ratio may appear to be unfavorable, or the stock may appear to be under distribution, suggesting that purchase should be delayed. Then, I put the stock on my watch list. As the price fluctuates, I refresh my fundamental research and reexamine the chart.
Nothing beats the market all the time, but instead of citing a poor drunken, erstwhile genius at the twilight of his career, why not investigate Dr. Gerald Appel. TA IS NOT PREDICTION, BUT TREND FOLLOWING. A little of both is far better than 100% of either.
Hey 29763: I couldn't have said it better myself. Please see my posts on the board tonight, in full agreement with your own.
The only, RELATIVELY, rigorous study I have seen on Technical Analysis is Thomas N. Bulkowski's 'The Encyclopedia of Chart Patterns'. Bulkowski does attempt to classify the success/failure rate of various chart patterns, based primarily on technical analysis. While I cannot claim to have read or understood the entire book, I am absolutely certain that there is not a single Technical Chart pattern that he would claim has a 100% success rate. Nor have I ever heard of anyone who would have claimed that Technical Analysis of a single stock chart pattern could predict the success of the stock in any direction. As a practical matter, most of the current TA's I have read, from Jesse Livermore to O'Neil to Marder to Kaltbaum ALL state that you have to incorporate a.) the company's fundamentals - at some level, b.) the market environment (the trend is your friend), and c.) the behavior of the sector or group of which the stock is a part, and d.) Angry Candy is absolutely correct, the holy grail of the TA's that I have read is money management. When you're wrong about a stock, get out and admit it. Technical Analysis does have a voodoo feel to it - when your stock goes wrong. Doesn't pure Fundamental Analysis have the same feel to it? And I think I even know why: because the future is unknowable. Eventually, even Warren Buffett has a bad year. Eventually, MSFT will lose its grip and become a value play instead of a VC play. Even LTBHers know to sell down to your sleeping point. I think you have to pick an investment style that works for your temperament and personality. I think we all know that no one can beat the S&P every year, all the time...because no one will live that long. TAs and LTBHers are doing the same thing: trying to find something that works in investing and limits/reduces your risk to the point where you can sleep at night. If LTBH works for you, use it. If TA feels good, go for it. I would almost bet that the main difference between the different people using the different techniques has to do with WHEN you first started investing and how successfuly you were with the technique. If you first started as an LTBHer and you were successful, then it's unlikely that anything is going to convince you there's something better. But if you bought AMAT at 110 this year, based on what you thought were good fundamentals, and you thought you were an LTBHer, and this was your first investment, you might have lost a little faith in the future at 60. However, if you had had the opposite experience and bought it at 15 and watched it go to 100, you might be an LTBHer for life. To their credit, the Motley Fool publishes the details of their results, and I know of no Technical Analysts who do this in such an open way. From that perspective, TA feels more guarded, but the Motley Fool is a fairly young enterprise, whereas TAs have been around for almost 100 years now. The Motley Fool is going to have to ride out a lot more years like 2000 before it can convincingly make the claim that its returns are market beaters over the long term. VC funds and Hedge Funds go belly up in hard times, too. Can you say 'Long Term Capital Management'? As do TAs, regardless of their money management. Jesse Livermore claimed that he could not make a living trading stocks from 1911-1914. He is not clear as to the reason, though I suspect he got a sideways market and could not ride a trend for any length of time. As for any TA who thinks they can predict what is going to happen tomorrow, this is simply a TA who has gotten a little too full of him/herself, and they are ABSOLUTELY not following any Technical Analysis discipline I have ever seen. O'Neil states very clearly that his techniques for selecting the beginning of a new bull market are only effective 80% of the time.Use what works for you. Use what you can sleep with at night. There is no holy grail. Past performance is the best predictor of future performance, but perhaps not THIS year's performance. Or the next five year's performance. Good luck with whatever method you choose.Dave
If you looked at a stock that was going down hour after hour, day after day, and week after week would you consider buying it? Of course not - congrats you just made use of TA.
<<The things I have to say about Random Walk would be censored by the good folks at Fool HQ. :)>>Not if you stick to the facts and avoid personal attacks. :-)<<As a die-hard skeptic and devotee of the scientific method, I respect those who question TA. It is a very thorny issue and I honestly cannot think of a fair way to empirically analyze the result of "technical analysis as a whole." This is simply because the potential returns from employing technical analysis are so intertwined with the money management technique as well by the trader's own personality that I don't think it is possible to isolate "Technical Analysis" the way one can isolate, let's say, certain mechanical investing screens.I realize that sounds like a cop out but I would also say that the same thing applies to the buy and hold approach.>>Actually, I wouldn't say it's a cop-out. What you say makes sense. But at this point I need to actually go read the studies and find out what they did to try and isolate the TA part of individual investments. Aside from that, Random Walk also referred to studies that attempted to find any correlation (beyond chance) that stock patterns had with furture prices. This definitely isolates TA indicators from the whims of the practitioner. These studies also showed no correlation. Can TA be beneficial if this is true? How?(Sorry to keep bringing up Random Walk but I just finished it so it's fresh in my head.)Fool on! Phool off!Joseph RichardsonTMFPhool1@aol.com
<<Aside from that, Random Walk also referred to studies that attempted to find any correlation (beyond chance) that stock patterns had with furture prices. This definitely isolates TA indicators from the whims of the practitioner. These studies also showed no correlation. Can TA be beneficial if this is true? How?>>What were they testing? Where the stock was a month/six months/year from a certain technical signal?I would argue that isn't a particular useful way to evaluate TA.Let's say someone looking at the price/volume action on stock XYZ sees it has been basing between 23 and 25 for a few months with moderate volume. Then the stock breaks above 25 on heavy volume. Assuming the trader has been watching this stock and decided it is a buy on a breakout, he has placed a buy stop order at, let's say, 25 3/8.Before placing this trade, he also needs to know where his stop loss order goes. Perhaps it is just below 23 where the bottom of the base was or perhaps it is even tighter. He also already needs to know his goal for this trade in the first place - what time frame are we talking about, what quick profit would he be willing to book, etc. Further, if the stock does advance to, say 28, he may then already have a plan to raise his sell stop to 26, insuring that he not see a gain turn into a loss.So if the stock keeps rising but then sinks and he is stopped out at 26 then it keeps on sinking to well below 23 (the old base) can we really evaluate the success of this trade by seeing where the stock is at an arbitrary point in the future?Some traders shoot for a very high success rate, keeping tight stops and booking small profits. Others fully expect to lose on more than half their trades but by managing their losses, they expect the winners to be outsized enough to beat the market.I honestly can't think of a valid way of assessing TA's validity other than finding individual traders who have consistently beaten the market.Perhaps TMF would wish to do an interview with Gary B. Smith, TA guru at theStreet.com? I don't know if TMF and TSC are considered "comeptitors" or not but I do know Mr. Smith would help provide a professional viewpoint on the issue.-chris
Follow up on Angry Candy's suggestion: TMF might talk to Kevin Marder, Loren Fleckstein, Greg Kuhn or Gary Kaltbaum for William O'Neil type intermediate term trading at www.tradingmarkets.com. After all, Bill O'Neil featured the Motley Fool portfolio in an IBD article earlier this year. For day traders, I'd suggest Kevin Haggerty or Jeff Cooper or Goran Yordanoff on the same site. These people are all - or so they are presented as - full time traders and hedge fund managers. They ALL use different variations of TA. They will all acknowledge that it is art rather than science, and they will all acknowledge that there is no way to do it well without a LOT of practice. Haggerty says that 75% of day traders fail, so you can figure it is about as demanding as medical school. There's a lot more than TA that makes a trader, as Angry Candy points out, you have to have a CLEAR plan from which you do not deviate once you are in the trade - unless you decide you should. The only way to do a statistical study is to follow one of these people and track their results.Dave
Must be a slow day at The Fool to be picking on TA.Don't you guys have something on the lastest electronic gizmo's or maybe CRA has found a way to clone an 82 Mouton?Anyway i've seen that same test (with a chart of earnings) being put to a FA--he did not pass the test either.I'm ready to take the test--reputation be damned!
AWF - If you are ready to take the Train test, I am VERY curious as to what kind of TA you consider yourself? If you are a TA, then you know that all you have on your side are probabilities, and that nothing in a single stock chart reveals the probabilities about tomorrow. Without also knowing the market conditions, the current sector action, or the direction of something else, you're whistling in the wind with a 50% possibility of being right, nothing more. You might as well bet on a coin toss. Who are you trying to kid? Most of the people whom I know who call themselves TAs wouldn't even try to trade such a chart, they would only wait UNTIL they had breakout confirmation right in the middle of the trading day, and then they would place stops immediately. Why would they place a stop? Because they know they don't know. They know that nothing in the chart confirms future or guarantees price action. If you can reliably do this - even 51% of the time, you are already far too wealthy to really be concerned about any of this. The game is now much too easy for you, and I am sure you are on to other pursuits in life. Even with a clear breakout from the previous day - without an understanding of market conditions, or the confirmation of a trendline somewhere out in the future, I am very curious as to what form of Technical analysis you are representing. Look at LEH or MER from this Wednesday. If all you had to go on were the chart up to Wednesday, what kind of a prediction would you make for for Thursday? 10 days from Wednesday?3 out of 4 valid cup with handle breakouts in Bulkowski's study had throwbacks to the lip of the cup within 30 days. 49% of the valid breakouts from cups with handles studied by Bulkowski failed to gain more than 25%. 13% of them didn't get beyond 10%. In the current market most cups with handles breakdown ALMOST the next day. Why do you think O'Neil is so strict about cutting your losses after 7-8%? I suggest you be asked to place your money at stake 1 day, 10 days, 20 days and six months or a year out, rather than just make a theoretical prediction. I am more than willing to stand corrected, but I just think you are making a rash statement that doesn't reflect well on you or TA. Unless, what you're saying is 'I'll take the test, who cares?'Dave
Right on! Technical Analysis is just another set of tools that provides information in addition to that given by Fundamental Analysis. FA is invaluable for stock picking purposes but pretty useless when it comes to timing buying or selling decisions. This is where TA shines.Also, when a stock looks like moving down further than one's pain threshold, TA can provide valuable information about where a valid resistance level is located and consequently where to set up a stop, just below that resistance. It does not work every time, nothing does where TA is concerned, but often enough.I am fairly new at this game but I realised from day one that my lack of experience mandated that I used every tool available, so I went into TA big way. While I will not surprise anyone by stating that my portfolio's performance so far has not been up to the expectations I had some 12 months ago when I got started, it is clear that it would have been much worse without the help of TA.People unfamiliar with TA make fun of the obsession with patterns like pennants and so on, what they do not realize is that chart analysis tells us a lot about the psychology of the market and the attitude of its participants towards individual stocks. Moreover they completely miss out how much fun it can be to work with charts...
Dave---I use most of the known TA techniques. And as you have said general market conditions, sector/groupstudy/and individual stock price trends are all important to me. I use wkly stochastics in determining buy and sell points along with natural areas of support and resistance.To the Stocks you mentioned: LEH & MERLEH:Monthly Trend = At the Top--Price range $78-86Wkly Trend =Still moving up but no higher than $84-$86Daily Trend = moving down but has to move back up in concert with the wkly trend--again no higher than $84-$86MER:Monthly Trend = At the Top--Price Range $72-76Wkly Trend = Consolidating between $58-$72Daily Trend = starting downward the wkly trend will add to the breakdown from its current price.If these 2 stocks are to move up to the ranges i have mentioned they will have to do it in the next 3wks-I'm looking for a new LOW for the general market about Mid-February.All the best
Good morning, all...Who is William O'Neil and where can I read some more of his writings?Bo
I can only see whether a stock is being accumulated or distributed and whether it is close enough to support/resistance for me to make a trade with an acceptable risk/reward ratio.TA is simply an effort to better calculate the odds so that you only place your bets on situations which you believe are most favorable to you.Well said.A similar argument to that which Bill composed could be applied to the Rule Breaker RS>90 requirement, or the Rule Breaker requirement for "an analyst to have called the price grossly overvalued." Am I going out on a limb to suggest neither Warren Buffett nor Phillip Fisher applied such unproven methodology? Do we know of any successful long term investor which used this methodology? Hey, where are all the stars? <ggg>Technical Analysis is a tool. You are free to use it if you wish. If you choose to completely ignore it, or use it as your only tool, you do so at your own risk.The Rule Breaker philosophy stresses relative strength performance. TA is in many ways a more descriptive relative strength. Not only do you see its price action relative to all other stocks, you can guage the validity of the relative strength by comparing the price and volume of shares traded.I purchase no company which fails to meet my criteria for strong fundmentals, internal profitability (ROIC and FCF), and fair value via DCF analysis. Nor do I purchase a company which is anything but the leader of its space and niche. TA is a tool which allows me to determine if the time is right to purchase, or as AngryCandy stated, to 'put the odds on my side.' There are no guarantees, which is all the more reason to increase the odds in my favor.There will be some on TMF boards, perhaps here, who will reduce the discussion to monads and voodoo. I have no time for it. If someone refuses to accept a tool which could potentially benefit them, it is no skin off my back.DP
And yet the studies cited in Random Walk suggest that TA does not provide any advantage over chance to beating the market averages. Hey Joseph, what did Random Walk have to say about screening for stocks which analysts have called "grossly overvalued?" What is Random Walk's position on giving 2-3 points for a company with a gross margin over 50%? See how easy it is to discredit a technique?I've spent enough time in statistics to know anything can be proven or disproven by a theorist with an agenda. It is my assertion Random Walk found exactly the "facts" they wanted to find before they set out in their "study."When all is said and done, Random Walk is just another book written about the stock market. It is not the Bible. Yet I so often see opponents of a methodology refer to Random Walk for their "proof." What their study fails to acknowledge is I can look at a chart of price and volume, and you can look at a chart of price and volume, and come to completely different conclusions. Perhaps Random Walk should have backtested art to proove it is not a science.I find myself more 'amused' than 'educated' by TMF boards lately, lol.DP
I think TA can work for those people who jump in for a point or two, with a lot of shares at stake. Not my style. I do, however, use Vector Vest TA to decide whether or not to buy a stock that I like at this particular time. Mostly it tells me whether the stock is on the way up or on the way down. Certainly down trending stocks can explode upward, and up trending stocks can head down. It seems reasonable to me, and seems to be working, that the implied momentum technique recognizes investor sentiment for a particular stock. That sentiment is likely to be rather stable unless some really good or bad news pops up. For the latter, I maintain trailing stops.Can't say whether this is better than any other way, but it fits me personally just fine. I would be happy to hear from anyone who agress or disagrees.Bill Stetson email@example.com
Bill Mann overstates the claimed benefits of TA and then, having propped up his straw man, proceeds to knock it down. If you take any approach to the extreme, its easy to criticize. The people responding above in defense of measured and balanced TA have got the right idea. Certainly works in a market like this. What does not work is Gardner's buy and hold forever philosophy as regards the tech sector. Incredibly the Gardners have been telling everyone for the last 1500 points to continue to invest right now, pour everything you've got into primarily tech equities, etc. etc. The approach lets the market "do its thing" with the believe that eventually over time the adherent will be right. It implies that one should buy the nazdaq with average PE's of 150, then 125, then 100...but still far above historical PE averages.....a dangerous and reckless proposition. David Gardner with his recent article sounds increasingly "wrong." It may be a sound thing to pretty much stay long term with sound dow stocks, but even in good times the techs/nets experience summer selloffs in the 50 to 65% range. This occurred even during the bull years of 98 and 99. This year of course, like turtles in their shells, no...better yet, like an ostrich on the savannah plain, sticking their heads in a hole with a dangerous economic environment about, clinging to their philosophy.......I was never sold on their buy and hold volatile techs even in the good years, given that these stocks lost over half their values during the summers. The concept of holding tight despite ridiculous historical valuations is downright silly. The Gardners are to be complimented for being early on the internet, starting the motly fool way back when and preceiving value in 100% committment to the techs/nets during its heyday. They remind me of cmgi and David Wetherwill who also was there ahead of everybody else, with his stock going up 600% or more three years running. He was seen as a rock star visionary. Cmgi is almost a penny stock as I write. The problem with DW, like the Gardners, is that he continued to preach full investment ALL THE WAY DOWN, and did not care to appreciate the business cycle turning, and the disproportionate impact on HIS SECTOR (again, just like the Gardners) DYNAMITE is a great tool if used constructively, but there comes a time when the work is done, and if you still have it in your hands with the fuse burning down...well...you get blown up, just like cmgi's stock price. KNOW YOUR SECTOR, but the GARDNERS presist in ignoring the sector's volitility and the business cycle, all because.....their grandfather (as I recall) bought and held S + P stocks way way back when. PLEASE NOTE TOM and DAVID: he was not holding long term nets and techs.......So Bill Mann, you good natured but slavish adherent, you know what they say about people living in glass houses....Buy and Hold the s and p perhaps, like their grandfather did, but not the nazdaq. If he was so smart, he wouldn't have....
I'd like to take the challenge. I'm not a pro, I just read one book many years ago (Magee) and about a year ago started discovering stock market web sites with charting capabilities. I have a bunch of "portfolios" on Clearstation. Some are various TMF portfolios, and screen results. Every once in a while I check them to see how various strategies, tips, screens, etc. are performing.On November 6, it seemed to me that lots of charts I follow were behaving similarly, so I grouped together a portfolio of 40 stocks from my "watch list" that looked to me to be about to make a significant move, based strictly on a perusal of the chart for less than a minute. I don't even know what some of these ticker symbols stand for, I just know that the "tea leaves" said these stocks were going somewhere soon.Before I tell you the results so far, decide for yourself what the range of likely possibilities are, if technical analysis is voodoo, and a rank amateur tried to do it. Maybe this basket of 40 stocks should do about what the general market has done. The Dow is down 3%, and the S&P 500 is down 9%. Maybe it should do what the NASDAQ has done. 32 of the 40 stocks are 4-digit ticker symbols. QQQ is down 31%.So, if you gave an amateur technical analyst a list of 40 stocks and forced him to take a position in each one, and the market went down 26% (the weighted average of 3, 9, and 31), what result would you expect from his portfolio?I shorted all of those stocks (not with real money, unfortunately), because that's what the charts said to do. My portfolio is up 35%. 2 of the stocks are down over 80%. 12 are down over 50%. One went up. Despite mixing in 8 NYSE stocks, I beat the NASDAQ average.An anecdote, certainly, not long-term proof. But what are the possibilities that I, a rank amateur, could achieve such results using "voodoo"? Small, but ok there is a possibility.On October 19 and 20, I had reviewed my watch list in the same way, and on that day picked 21 stocks. That portfolio is up 47%. One stock went up, the rest are down between 18% and 83%. Now is it still voodoo?The contest, as stated, is biased against the chartist. Nobody takes a position on every stock every day. Most of them you pass on, so rather than simply "higher" or "lower", "can't tell" should be an allowable answer. Using past data is also no good, if the fundamentalist is allowed to pick the data. It's too easy to rig. Take SPY on April 13 for instance, and ask whether it will be higher or lower on May 12, May 15, and May 18. (It was lower on the 12th, higher on the 15th, and lower again on the 18th.) Who is going to get that right? And who cares?We can do this in a way that should at least amuse and enlighten us, if not enrich. Let the technicians suggest stocks whose charts they think are showing predictive patterns. Let the fundamentalist choose one of them, and then let the technicians take their positions. To keep it reasonable, let the time frame be a month. The suggestions should be made on Monday, the one stock selected and the positions declared on Tuesday after the market closes. The technician will be presumed to have made a market buy or short sale at Tuesday's closing price, and can enter a limit or market order to close the position at any time, and if he does not do so it will be closed after 30 days. (This is an improvement over the WSJ dartboard contest, where you must hold the position for 6 months even if you would have closed it in real life.)Do it once a week for a few months, and check the results.It would be fun for everyone to participate, but unless you're willing to do some programming, you may have to limit the actual contest to a few professionals (if you can persuade them to do it). The rest of us can follow along and keep track of our own results, just for fun.You will see, also, that not every technician will take the same position on every stock. Just like fundamentalists, they will come up with different answers using the same data. (That explains, by the way, why technical analysis still works even though lots of people do it -- just like fundamental analysis, which still works even though lots of people do it.)So, do you (not you, AngryCandy, the Motley Fool as an organization) accept MY challenge?
Candy, I very much enjoyed your earlier post and totally(well, within 2STD) agree. Who is the bigger fool however, those who argue with fools, or fools who argue about something they know nothing about? The *challenge* demonstrates the abject lack of knowledge required to discuss the issue. The random walk theory has three versions. The *strong* version states that fundamentals do not have value to predict. Fundamentalists prefer to pick and choose the science as it suits them.Justifying a 50% loss on the basis of high risk, suggests that games of chance are also acceptable investing techniques. What is next? Grabbing falling knives? I would throw the challenge back except they have already demonstrated their ability. Given a set of fundamentals they considered favorable they chose a portfolio which resulted in a 50% loss. Given their historical returns, how long will it take them to now make a 100% return, so that they break even? I have done better. I am sure that you have. I suggest that large numbers of TA types have done better. I use fundamentals, TA, and every other tool available, such as your mentioned money management, to invest. Investors have a God given ability to explore and learn. Instead some choose to follow the crowd like lemmings, comfortable with the thought that everyone knows that TA is NG. Everyone except the tens of thousands who beg to differ.Good luck, and I really admired your posting.OSL
Hey Joseph, what did Random Walk have to say about screening for stocks which analysts have called "grossly overvalued?" What is Random Walk's position on giving 2-3 points for a company with a gross margin over 50%? See how easy it is to discredit a technique?You have discreditted nothing by asking the questions. I've spent enough time in statistics to know anything can be proven or disproven by a theorist with an agenda. It is my assertion Random Walk found exactly the "facts" they wanted to find before they set out in their "study."It's not clear to me whether you've actually read Random Walk. If not, then you should not make such assertions. In case it was not clear, the studies were not done by the author of RW. They were simply cited by him.When all is said and done, Random Walk is just another book written about the stock market. It is not the Bible.Never said it was. But I thought its arguments against the efficacy of TA (and for that matter FA) had some merit.Fool on! Phool off!Joseph RichardsonTMFPhool1@aol.com
The *strong* version states that fundamentals do not have value to predictActually, the strong version says that NOTHING, past prices, chart patterns, published information or even or even unpublished developments, can be of use in predicting future prices.Fool on! Phool off!Joseph RichardsonTMFPhool1@aol.com
This article has to be the most simplistic, straw-man, dichotomous rant I have ever read. How long until otherwise intelligent, highly educated people will understand that:1.) there is no such thing as "pure" technical analysis;2.) that technical analysis incorporates a broad spectrum of theories, some of which (like some fundamental theories) are probably worthless;3.) that all of us, whether we realize it or not, use technical analysis to some extent.Technical analysis is nothing more than the study of price (and volume) in an attempt to assign probabilities to future price movement. That's it. If you've ever invested in a high relative strength stock (e.g., via the CANSLIM formula), you've used technical analysis. If you've ever scanned the list of stocks in the New Low or New High column of the Wall Street Journal, you've used technical analysis. Come to think of it, if you've ever used a price-sales, price-earnings, price-book, or price-cash flow ratio, congratulations: you've used technical analysis.A book that Gardner et al gushed about, "What Works on Wall Street", by O'Shaughnessy, showed that one of the most powerful predictors of what a stock will do next year is what its stock price did last year: buying the 50 stocks that appreciated the most the prior 12 months and holding them for 12 months returned over 16% per annum from 1950 to 1995; the worst strategy was doing the opposite (buying those that fell the most), which returned less than cash. How can you praise O'Shaughnessy yet dismiss technical analysis?The argument about whether technical analysis works or not is about as silly as whether markets are efficient (they are and they aren't) or random (they are and they aren't) or whether for that matter there is life after death or if light is a particle or a wave (it's both) or how many angels can dance on the head of a pin.I would suggest to Gardner et al that you do your homework before blasting something you clearly don't understand. In the firm I work for, our chief investment strategist's technically 1-ranked stocks soared 66.8% last year (his 2's scored above 30% and his 5's (the lowest rating) lost half their value). The fundamentally ranked 1 stocks gained only 14% by comparison. >Technical Analysis is a simple science: It states that stocks that are in motion tend to stay in >motion, that a stock that rose today is more likely to rise tomorrow. That's true of trend-following analysts; an entire branch of technical analysis is devoted to studying the opposite phenomenon - so-called oscillators.As per the O'Shaughnessy study and a few others, there is plenty of evidence to support this notion, at least in the short-to-intermediate term.>It is a powerful tonic for those who are terrified by the notion that short-term stock market >movements are without rationality. Technical Analysis allows investors to say "Ignore the >reasons, they are meaningless. Focus on the patterns." There are very few pure technicians who ignore fundamentals, but I would wager they would vastly outperform pure fundamentalists who ignore technicals. Most of the money I've made over the years I've made through technical analysis, often without fully understanding the fundamentals of the company whose stock I bought (I'll admit it). On the other hand, some of my biggest losers have been "value" stocks touted by some manager who argued that the stocks "had to go up" and were "mispriced" based on some fundamental sum-of-the-parts analysis. Maybe they were mispriced, but more often than not the stock was going down for a reason that was not yet publicly available (or appreciated). The chart told the story that the pundits didn't know yet.>The pure technician ignores such basic concepts as stock value, price, or other fundamentals on >the belief that the institutional investors leave telltale signs when they are moving into or out of >stock, and that the "smart money" telegraphs its actions by virtue of its sheer size.>This is a powerfully attractive theory, and I do not doubt that there are those who can practice it >with some success. But these people are not the "average" technical analysts. They are, in fact, >few and far between.Really? Let me name you a few examples: Vic Sperandeo, who averaged over 70% a year without a down year for 14 years; William O'Neil, the founder of IBD, who turned less than $10k into over a quarter million in 2 years; Richard Dennis, who not only made a fortune and manages billions using technical analysis but trained a generation of traders to do so (the so-called Turtles); Larry Williams who turned $10k into several million in a couple of years trading commodities with technical analysis.Sure, there are plenty of people who don't have this level of success, but there are very few successful money managers who don't use technical analysis at all. In fact, I think you would be hard-pressed to name one. Anyone who rode the Internet bubble into the ground ought to learn a thing or two about technical analysis. But why learn about something if you're convinced it doesn't work? You remind me of the scientists who have "proven" that the bumble bee can't fly. Technical analysis got me out of tech in the spring of 2000 and into financials and healthcare over the past several months. I'm not smart enough to figure out why these things work nor do I really care. All I know is that my research and personal experience repeatedly demonstrate what so many self-declared pundits refuse to acknowledge: technical analysis, like any tool, works.
You are of course correct. Your point being that one of the other versions must therefore be the correct one? The belief that the strong version cannot be right is now proof that the semi-strong version is correct and ipso facto TA is NG?Perhaps the Random Walk(RW) analysis approach has a fatal flaw, all versions. Some in academia entertain that outlandish thought. Because the theory may be flawed does not mean that the concept of fundamental analysis is wrong. It would mean however that fundamentalists would need a new theory to support their holy mission of driving TA types, with their radical ideas, off the boards where investors meet. I am very tired of the argument. Fundamentalists are free to pick and choose whatever science supports their position, and reject that science which suggests otherwise. On one hand they reject RW, and on the other they preach it. I am sure it appears logical to some. While I applaud the stated goal of searching for a better way to invest, I am deeply disappointed with the approach taken in the bully pulpit article. Chris said it well, buffoonery. Repeating that ridiculous challenge did not, in my mind, bring credit to the writer or the organization.I am a firm believer in the value of fundamental analysis. I use your services. I think you do a great job. I also think, as I believe Chris most likely does, that you should avoid talking about TA until such time as you understand what it is. FWIW and IMO. Keep up the good work.OSL
<<Chris said it well, buffoonery. >>Just to be clear, I did not refer to Bill's article but rather John Train's challenge as buffoonish. I think that is a word which describes Train quite well in many ways but that's another story.I think Bill's article represented his point of view quite well but was based on the false assumption that TA is intended to be used as a predictive tool. However, this is a common misunderstanding shared by many practitioners of TA as well as its critics - including some of the "big names" in guru-dom.Anyone who shows you a chart and then follows it with some claim "The market should rise/fall X points in the next 3 months" should be ignored completely.-chris
Actually, the strong version says that NOTHING, past prices, chart patterns, published information or even or even unpublished developments, can be of use in predicting future prices....Which makes the Foolish-4 method, a highlight from the TMF Investment Guide, seem like a complete datamining crock.Random Walk spends a lot of time proving what doesn't work. Of course, the practicality of this is nil. This is akin to calling Home Depot and asking them how to install windows, and having a rep tell you how not to install windows. Either way you still walk away lost.Fool On. Fool off. Whatever...
<<Just to be clear, I did not refer to Bill's article but rather John Train's challenge as buffoonish.>>Chris, I am sorry that it was not clear in my posting. I tried to link it to my following sentence. You were perfectly clear in your original post, IMO.I believe we think very much alike in regards to TA. I wonder though if you are not too cautious in presenting the power of TA. I have no problem with statements such as "the market could easily fall 30%", which I made in Nov., or " 4 is possible but 2 more likely before 4". While only God knows the future he has given us the ability to learn from the past and present. Much of TA is analysis of trends which we look to continue. It is of course, even more than that. I fully agree with you that words such as will, must, and should have no place in TA. This of course brings up the following point.I thought that the article's reference to a value, with a stop, as being a perfect hedge, was a cheap shot which reinforced the image that the author had little understanding of TA. In that regard, your presentation that TA is not universally understood, and is often misrepresented, was done very well. Again my apology for not being clear concerning your use of the word buffoonery.OSL
AC writes:I honestly can't think of a valid way of assessing TA's validity other than finding individual traders who have consistently beaten the market.We get caught up in the day-to-day action of investing and the rigorous analysis of the methods we use to pick stocks. We have the internet to burn up time and converse regarding stocks and making money on a minute-to-minute basis. The depth of argument and time spent on what method is better than another astounds me. It is the academician's way, the philosopher's. In truth, we all do this to make as much money as we can and the only measure is "am I on track to meet my financial goals with my returns?" This is why so few of my posts are riddled with exhaustive research, I just don't think it's necessary to be able to pick good companies that are on sale and will bring me a decent return in 1 day's time or 10 year's time, depending on circumstances. I don't worry about it so much.ab
Outstanding response Livermore2. Unfortunately for me, I was just learning about TA at the end of 1999 by reading “Point & Figure Charting” by Thomas J. Dorsey and visiting his site at www.dorseywright.com. This site has a daily column titled “From the Analyst.” On December 14, 2000, this column reviewed a December 11th 2000 article that appeared in FORBES titled "Stock Trends by Laszlo Birinyi Jr.: Fundamentally Flawed." The following is an excerpt from this column."Mr. Birinyi [money flow specialist] goes on to say [in the FORBES article]: "Yet, going more deeply, it doesn't matter whether analysts are doing their traditional job, because traditional approaches don't work in today's market. Not with the buzzing swarm of outside influences we must deal with." ... These statements are coming from a man who before this [year], totally and unequivocally slammed Technical Analysis at every opportunity. He now has come 180 degrees around. Listen to this next sentence. "And it no longer matters as much if a company's results are strong, which fundamental analysis has always hung on. That's why I am now incorporating technical methodologies, based on a stock's direction. Not necessarily to predict but to understand and warn." What does warn mean but to predict? ... Now that Mr. Birinyi has given up on fundamental analysis and come over to the technical side, he is still missing the boat. It's fundamental [analysis] coupled with technicals that is the winning combination." I remember myself back, in March 2000, interpreting the charts of the telecom sector and other technology-related sectors as being over bought. I wanted to sell my positions in these stocks, some of which I purchased back in 1997. Instead, I let my long-term perspective make me feel foolish for wanting to sell and I held my positions and never put stop losses in place to protect my gains. Needless to say, as of today, my tech investments have lost all their gains and a significant portion of their principal investment. So, the big question I have for the LTBH strategist is just how long is “long-term” and when and how does an LTBH investor determine when to sell. Quoting from the same “From the Analyst” column. “There are many market pundits that are long term bullish and since the market has a basic upward bias, their predictions will more than likely come true if they can wait long enough. However it's the 2000 point declines like last year that hurt your portfolio and can take years to make up.” All I know right now is that had I sold, as the TA charts had indicated, I would have locked in at least a portion of my gains. Anyway, I did learn a valuable lesson that it's foolish to ignore TA. I also think John Train's challenge is ridiculous. It is the equivalent of tearing in half a trend chart of a stock's price and giving the first half to a fundamental analyst. Then, asking him to tell whether a stock was higher or lower in the second half using a balance sheet, P&L, cash flow and other relevant information, striped of any identification as to company name or time. I think rather than trying to create division between TA and fundamental analysis, TMF should be educating Fools about TA and objectively investigating how best to use TA to optimize investment strategy. This would fit perfectly with their education mission. I also think it would be great if TMF would develop a “long-term” stock portfolio based on the combination of the two techniques. Then, duplicate the portfolio and base one portfolio on a LTBH strategy and the other based on TA recognizing the key role sector rotation plays in TA and adjusting the TA portfolio accordingly.I often find myself switching between Fool.com and DorsyWright.com for fundamental and technical analysis. It seems that the technical analysts aren't fools, they realize that fundamental analysis coupled with technical analysis is the winning combination. I hope TMF will continue these discussions objectively and invite people like Tom Dorsey to contribute to this long-standing debate. But more importantly, I hope TMF will strive to educate Fools enough about TA so that they can draw their own conclusion as to whether or not they should incorporate TA into their strategy.TMF, keep up the good work.
sosa58 writes:I think rather than trying to create division between TA and fundamental analysis, TMF should be educating Fools about TA and objectively investigating how best to use TA to optimize investment strategy. This would fit perfectly with their education mission. I also think it would be great if TMF would develop a “long-term” stock portfolio based on the combination of the two techniques. Then, duplicate the portfolio and base one portfolio on a LTBH strategy and the other based on TA recognizing the key role sector rotation plays in TA and adjusting the TA portfolio accordingly.Bravo, excellent idea. TMF's stated mission is "Educate, Amuse, Enrich", and they do an excellent job, particularly with the latter two, but TA is part of investing as is market psychology and should be included in the topics covered by The Fool. We all know that the Gardners derived their LTBH and never sell strategy from Warren Buffet, and who better to emulate, but Buffet does sell when he has made a mistake. Now, with 50% losses in the major portfolios, TMF is addressing sell strategies. I think the biggest thing that bothers me about TMF was not their intital vehemence about LTBH, but the subsequent, gradual wishywashiness toward any particular investing method because of one atrocious year. I want TMF to come around to exploring all avenues of stock-picking, but what gets me is now that the TMF staffers have all been indoctrinated on the LTBH, and because they are such a tightly-wound clique, they get very defensive when I (and many others) take them to task on articles they write that will be seen as gospel and truth by newbies and novices. This is art as much as science, and that's okay. Let's not pretend otherwise and create false expectations.I hope TMF will continue these discussions objectively and invite people like Tom Dorsey to contribute to this long-standing debate. But more importantly, I hope TMF will strive to educate Fools enough about TA so that they can draw their own conclusion as to whether or not they should incorporate TA into their strategy.TMF, keep up the good work.Agreed again sosa58. The Motley Fool is the best site on the 'net for discussion of nearly any topic but investing in particular. I am grateful for its existence and applaud the Gardners for their mission and incentive in developing, and allowing the development of, this community. If I am critical, it is because I want the best for TMF.ab
TMF is good at starting a thread. This one is no exception though a few months late. Good to see many good responses on the subject w/ many good points.Many may think TA as a predictive tool. Some may like to think TA as a tool to help you how to react. As to the applicability of TA, different pple may like use it different ways, yet for one simple goal - to profit. Knowing a tool is one thing. How to best use it is yet another thing. One needs to choose the time frame for one's study. One needs to react to the market quick enough to achieve better results. That's to apply money management properly. They are the twin -- Consider TA and money management almost like a couple and be happy with them.~~~~~ Be well, prosper and happy. ~~~~~~
i'd be perfectly happy to join you in the debate over the effectiveness or lack of effectiveness of technical analysis. first of all most of the explanations of technical analysis comes from fools who don't understand it or who have learned from the "how to make a million overnight" books. for the true practitioner, technical analysis is all about market psychology. the point is no matter which methodology you use, technical or fundamental, two people using the same methods will very often diasgree with one another.fundamental analysis has its merits, but it is not the holy grail of investment methods, but neither is technical analysis. i will say, though that there are plenty of technical investors who have been successful for a long time. the difference is that they consider themselves speculators, not investors. george soros paul tudor jones, ed seykota, richard donchian, and scores of others have been successful speculators for quite a long time. also, stop using warren buffet as the poster boy for fundamental analysis. he is not a shareholder but a stakeholder. he is definitely not analysing companies hoping that the stock will appreciate over the long term like small shareholders do. he invest for current and future income, not share appreciation. two totally different concepts.the point is, even if you could acurately figure out the fundamental value of a company, which you can't. and even if fundamental analysis had any predictive, value, which it doesn't, all the p/e ratio's, book values, and cash flow analysis in the world will not tell you what the next fool will pay for the stock, why he's buying it, where he's willing to sell it, etc.one more thing, this market is not a "bad" market. that's a subjective description. it's been a great market because it's fallen so fast, trading the short side has made us "trend followers" a killing. remember, bulls go up the stairs, bears go out the window, and pigs get slaughtered! i'll leave you with one last thought. it makes no sense to be a bull if the markets bearish or a bear if the market is bullish. be on the right side and you can make money no matter what the market does. lmck:)
Dear Passionate TA investors:I have met some very intelligent individuals who use and passionately defend technical analysis just as many of you do. In fact, if you study Warren Buffett very closely and read many of the books that are written about him, you will find out that in his early years before he discovered Ben Graham by reading the book, The Intelligent Investor, Mr. Buffett did some speculation on high flyers. He also applied some approaches that you might include under the caption of technical analysis.According to Barron's Dictionary of Finance and Investment Terms, the term “technical analysis” is defined as follows:“Research into the demand and supply for securities and commodities based on trading volume and price studies. Technical analysts use charts and computer programs to identify and project price trends in a market, security, or commodity future. Most analysis is done for the short- or intermediate-term, but some technicians also predict long-term cycles based on charts and other data. Unlike fundamental analysis, technical analysis is not concerned with the financial position of a company.”It seems to me that the definition of TA provided above suggests that TA is a predictive tool, not a descriptive tool (sorry about that AngryCandy).In the introduction to the fourth and last edition of the book by Benjamin Graham, The Intelligent Investor, Mr. Graham writes:“Since our book is not addressed to speculators, it is not meant for those who trade in the market. Most of these people are guided by charts or other largely mechanical means of determining the right moments to buy and sell. The one principle that applies to nearly all these so-called “technical approaches” is that one should buy because a stock or the market has gone up and one should sell because it has declined. This is in exact opposite of sound business sense everywhere else, and it is most unlikely that it can lead to lasting success in Wall Street. In our stock-market experience and observation, extending over 50 years, we have not know a single person who has consistently or lastingly made money by thus “following the market.” We do not hesitate to declare that this approach is as fallacious as it is popular.”In one of the chapters of his book, Investment Gurus, Mr Peter Tanous asks Mr. Peter Lynch about his opinion of technical analysis. Mr. Lynch provided the following answer:“The problem with technical analysis is the somebody could love the stock at 12 and hate it at 6. In pure technical analysis, the stock itself will show what's going on. You just have to watch the movement of the stock price. But to be fair, it doesn't apply to all stocks. Technical analysts will look at maybe ten formations and one will tell them something. So they might like something at 12 and hate it at 6 because the formation has changed. That bothers me.”Mr. Lynch goes on to say:“But with that at the background, I have traditionally liked a certain formation. It's what I call the electrocardiogram of a rock. The stock goes from say, 50 to 8. It has an incredible crater. Then it goes sideways for a few years between 8 and 11. That's why I call it the EKG of a rock. It's never changing. Now you know if something goes right with this company, the stock is going north. In reality, it's probably just going to go sideways forever. So if you're right it goes north and if you're wrong it goes sideways. These stocks make for a nice research list. You look at stocks that have bottomed out.”Based on the foregoing, the argument can be made that Mr. Lynch does, in part, apply technical analysis since he looks at stock charts. Of course, investors who have read his books know that Mr. Lynch very much engages in fundamental analysis as well.The smart individuals I met that use technical analysis do not conduct much, if any, fundamental analysis. Is this kind of like playing poker, betting on your cards, but not even looking at your hand? In addition, the technicians I have met play a short-term trading game on stocks as well. There are stock studies that show that the longer the time horizon, the lower probability of realizing a loss (assuming that you are investing in real businesses and buying at a good price in relation to value). In fact, during the 13 year period that Mr. Lynch ran the Magellan Fund, his average rate of return over the period was approximately 28% per year – quite outstanding. Yet, most investors that had a position in the Magellan Fund at one time or another over the 13 years under Lynch's management lost on their investment. This suggests that many of the “investors” in the Magellan Fund were actually short-term speculators.If you were going to buy a small business to own and operate would you do some serious fundamental analysis including a review of their financial results for several years, a review of the assets used in the business, a review of the customer base as well as employee and vendor relationships, etc.? Or would you ONLY go through the business opportunities pages of the newspaper and if the price for a business of this type begins to go up higher, that means it is time to put up an offer for purchasing it? What do you suppose the process might be when a company is looking to acquire another company?Buffett and others that believe in fundamental analysis and the value investing approach are merely trying to point out that investing works best when it is business like. Owning a share of a great business and buying shares when it appears to be trading below its intrinsic value is a business like approach. No stock chart by itself will tell you what the intrinsic value is for the stock. For this reason, most investors applying the value investing approach do not believe that technical analysis has much merit.As for the process of investing with a long-term view, one can simply look at the top of the list of the Forbes 400 wealthiest in the US and see that the one thing most of them have in common is that they held their stock positions for quite some period of time.Excellent article Bill Mann!Fool on,LeBeancountiere
<<What were they testing? Where the stock was a month/six months/year from a certain technical signal?>>There were many different sections on different types of TA but here's a quote from the section on Reading Chart Patterns.<<In one elaborate study, the computer was programmed to draw charts fro 548 stocks traded on the New York Stock Exchange over a five-year period. It was instructed to scan all the charts and identify any one of thirty-two of the most popularly followed chart patterns. The computer was told to be on the lookout for heads and shoulders, triple tops and bottoms, channels, wedges, diamonds, and so forth. Because the machine is a very thorough (though rather dull) worker, we can be sure that it did not miss any significant chart patterns.When the machine found that one of the bearish chart patterns such as a head and shoulders was followed by a downward move through the neckline toward decolletage (a most bearish omen), it recorded a sell signal. If, on the other hand, a triple bottom was followed by an upside breakout (a most favorable augery), a buy signal was recorded. The computer then followed the performance of the stocks for which buy and sell signals were given and compared them with the performance record of the general market.Again, there seemed to be no relationship between the technical signal and subsequent performance."For more detail, you'd have to look at the study itself.Fool on! Phool off!Joseph RichardsonTMFPhool1@aol.com
the computer was programmed You keep missing the point. Utilizing TA is not mechanical investing. It is not a nonthinking approach. It is not useful without thought and skill. Although some do, and apparantly are able to do ok with complete disregard for fundamentals, what most people here are trying to get you to understand that this is not an either/or proposition. TA is a tool. It is useful in helping to determine what the market sentiment is, where one is most likely to open positions that won't leave them immediately thinking "what went wrong?", and it can forewarn someone when fundamentals have changed long before the details of that change are available to you or I. Disclosure rules or no, we are never going to have the resources and information available to us that the Big Boys enjoy. You will never find a study that can realistically compare a fundamental approach to a technical approach because the success or failure of either depends directly upon the skill level of the investor/speculator. Just like there are thousands of unsuccessful daytraders who try to live by technicals alone, there are many thousands of people who thought they understood fundamentals who are now washed out of the market. Many for good.There are those on this board who want to make the argument that LTBH works primarily because the long term trend is up, therefore with the long term investor. If that's the basis for success in the market place, why deny that there are intermediate trends counter to that which can last months, or even years? Why would anyone want to invest counter to that trend? That is a losing position. And how will you know which direction the trend currently is without some ability to look at a chart? Why is investing with a 6 year timeframe ok, and working with a three month timeframe sinful?The only thing certain about this argument is that those with firm either/or positions are too eager to tell others what to do or not do. The "fundamental only" arguement is just and fallacious as the "technicals only" position. The former is the equivalent of saying "Since houses are composed of lumber all i need 2X4s to have a house". Without tools you won't get very far. The latter position proposes that the end result depends only upon the tools, irrespective of the material used. Both are full of crap. If anyone wants to learn anything about the use of TA without actually taking the time to learn some of it themselves then do some reading about people who actually do it for a living. Just like there are those who have done well with primarily the fundamental approach, there are thousands who have done well utilizing technicals to confirm, warn, signal, and maximize their investments.By the way, fundamenatalist are so fond of pointing to Peter Lynch as the poster child for FA...do you think for one minute that on his staff he did not have the benefit of some technical people who actually did the buying and selling at the most opportune times for him?Not everyone "gets it" when it comes to technicals. People should go with what they find the most useful and productive for themselves. But a tremendous disservice is being done when people out of hand and ignorantly dismiss as witchcraft tools which others may find useful.rickrick
You keep missing the point. Utilizing TA is not mechanical investing. It is not a nonthinking approach. It is not useful without thought and skill.I haven't missed this point at all. What I've been doing (in the last couple of posts) is saying "Well, what do you think about this information?" (Specifically, the arguments in RW.)[TA] is useful in helping to determine what the market sentiment is, where one is most likely to open positions that won't leave them immediately thinking "what went wrong?", and it can forewarn someone when fundamentals have changed long before the details of that change are available to you or I.And this is exactly what I'm asking. If this is true (that TA can "forewarn"), shouldn't these studies show somw kind of correlation between the indicators and future results? The studies cited in RW say "No". There is no correlation.Now I'm perfectly willing to accept that some individual who uses TA acheives above average results. Perhaps even over long periods of time. But I'm not yet willing to believe that those above average results are BECAUSE of TA. Or let's say "enhanced" by TA. Individual instances do not prove that TA is useful. Lady Luck is always hanging around. And that applies to FA, too.You will never find a study that can realistically compare a fundamental approach to a technical approachRight now I'm just exploring whether or not TA indicators have any basis any reality and therefore are useful.... because the success or failure of either depends directly upon the skill level of the investor/speculator. So what does this mean? Is the implication that with enough experience and practice that anyone can use TA to enhance their returns? Or that with enough effort anyone can apply FA to acheive above average returns? You're statement makes me think about the story of 100,000 people flipping coins. Only those throwing heads "win" and move on to the next round. When you get down to 10 people, are you going to say they are "expert" coin throwers?You can't just say that because someone has been successful in investing that they are skillful. At least, that's what all the TMF critics keep telling us.Fool on! Phool off!Joseph RichardsonTMFPhool1@aol.com
shouldn't these studies show some kind of correlation between the indicators and future results?The problem with the studies is that they attempt to detach the human being from the tool. A hammer without an arm to swing it isn't of much use. The successful use of TA requires one think, analyze, and interpret. There is no such thing as a "predictive formation" if it is not interpreted in light of the current situation. That's why studies looking for "head and shoulders" are useless. For example, stocks do not generally just go up and up. They go up in fits and starts. Each leg up is accompanied by a retracement, often up to 50% of the move. This is the period where profit takers leave, new buyers come in as the shares are "discounted", and if everything (the company, the group, the market and the economy) is healthy it has a high probability of continuing the move up. But let's say the stock falls very quickly with twice the volume it did going up. And it retraces 70% of the gain, and then proceeds to move back up on very low volume with narrow spreads, each move being met with selling pressure. And when one checks its cohorts one sees several have sold down through support levels. I would read that as a probable top and would make sure I had my stop in place. The computer may see nothing at all. It's not objective or measureable...but it saved me from losing considerable amounts of money last year. The LTBH with no regard for TA response is usually they will hold and be better off in two years. My response is I will be back into the stock before then owning perhaps twice as many shares as before for the same money. Individual instances do not prove that TA is useful.It most certainly does to that individual.Right now I'm just exploring whether or not TA indicators have any basis any reality and therefore are useful.You will no doubt get a headache trying to understand indicators. Some are useful to some people, most are of no use to most. If they are used mechanically one can measure the results but I think they are best used as guides to help interpret any given situation.For myself, I find that price, volume, support, resistance are useful. The rest of the indicators are all derived from those anyway. Why look at mathematical derivations when one can look at the original data? Others use them. Who can say?Is the implication that with enough experience and practice that anyone can use TA to enhance their returns? Or that with enough effort anyone can apply FA to acheive above average returns?Both. They are both important and useful. And as in most things, the better one becomes at using tools, the better the results. I thought that was the point of this whole thing. To learn so as to become better, and more successful.You can't just say that because someone has been successful in investing that they are skillful. At least, that's what all the TMF critics keep telling us.If they are consistently successful, I would call that skill. What else? If it's all luck, why bother with any of this?As for the critics of TMF, some are angry because they haven't done too well. They are refusing to acknowledge the "individual" portion of the term "individual investor" means that they, and they alone are in charge, and thus responsible for the performance of their portfolios. If they take bad advice, it was their decision to do so. If they fail to do their research, to learn all the tools that may be of benefit to them, their is no one else to blame. I think this site is a gem. rick
Chart patterns very frequently do not match the ideal form shown in reference books. They would be very difficult to program for. Many have very short term targets and experience tells me that they very substantially out perform the market in the time period it takes to reach the target. Some are very contrary to the market and I wonder how they were evaluated. The problem for me is, that they are all too rare. I would be interested in a good reference to the study you discussed as I would like to see a program which located chart patterns. I would like to see how they did it and perhaps it can be modified and made more accurate. What were you refering to in your post:There were many different sections on different types of TA but here's a quote from the section on Reading Chart Patterns.What was the book or report which contained that section on patterns? Was the study reported on in that section referenced sufficiently for me to find it?I am not argueing TA. I am asking for your assistance in tracking down the report you identified.OSL
>Right now I'm just exploring whether or not TA indicators have any basis any reality and therefore are useful.<"The trading signals from technical indicators do, on average contain information that may be of value in trading" Conclusion #4, p404"When the indicators signal long, it is generally desirable to be long" p32"Technical Market Indicators: Analysis & Performance" http://www.amazon.com/exec/obidos/ASIN/0471197211/sr=1-2/ref=sc_b_2/107-7569390-7446920FWIW. I found the reviews and reviewers interesting also. Much merit to all.OSL
The problem with the studies is that they attempt to detach the human being from the tool. A hammer without an arm to swing it isn't of much use. Well, said. And to which I counter, and even in a human hand a screwdriver is little help in driving a nail. In other words, even when you don't detach the human being from the tool, you still need the right tool for the right job.The computer may see nothing at all. It's not objective or measureable...but it saved me from losing considerable amounts of money last year. You may be right. But saying that it's not obejctive or measurable sure makes it sound like voodoo.Me: Individual instances do not prove that TA is useful.Rick: It most certainly does to that individual.This is like saying that someone should believe in a rain god because once they prayed for rain and it came.If it's all luck, why bother with any of this?Something to occupy our otherwise dull, dreary and lonesome lives? No, really. I don't believe it's all luck. So the trick is figuring out what it and isn't. Plus it's fun.I think this site is a gem. Cool, thanks.Fool on! Phool off!Joseph RichardsonTMFPhool1@aol.com
Chart patterns very frequently do not match the ideal form shown in reference books. <?i>I'll agree to that. But if the ideal patterns are truly ideal and representative and the computer picks out just these ideal patterns and misses those patterns which fall in the gray area of interpretation, then shouldn't the computer identified patterns still show some correlation with future price movement? After all they are the ideal patterns, right?What was the book or report which contained that section on patterns? It was "A Random Walk Down Wall Street", chapter 6. The bibliography for chapter 6 contains almost two pages of references to studies and reports which, I assume, includes the chart pattern study.Fool on! Phool off!Joseph RichardsonTMFPhool1@aol.com
Livermore2,You are right on the money. And I mean MONEY. The Motley Fools have been the past trying to explain something they do not have experience in. They assume the most successful investors do not use chart for reading. Well, I know quite a few more than in your reply who have been very succesfulL. But good that you have ready named some of them already.Listen to this. Bill Mann, not sometimes ago, after their portfolio has been beaten up badly by the market, came up with a point system where he assigns points to different categories based on the company fundamental ratios... The total points then are added up, and he uses it as the stock selection. Well, behold my ALAH. If he uses this month after month and year after year, as the company is doing better, wouldn't the points of that stock rises, and wouldn't that be sort of like a chart of the stock performance??? It is so ridiculous.I have sent some msg previously regarding their poor timing of entries and exits. Their reply is NOT to follow what they do even when they follow their rule breaker and maker philosophy. I think it shows me they do not have really a hang of it yet.Bill Mann talked about CSCO. And I guess he does not know material well enough. Who is in the world playing CSCO if they know how to read chart? I think his misconception is Technical Analysis people try to predict all stock, all trends. I hope someone could clarify this for him.I guess talk is cheap. Could you set up a Poll and ask how many people want to see the performance of each method taking all tax consequences and commission cost into account? Well, subsequently, maybe we ask them to set up a contest. Does it sound fun to you?I have recently asked them to open a discussion board where we only discuss which tickers to play for both short term and long term using purely Technical Analysis. Hope, they do not see this as problem to their business.
I think the best analogy to explain the usefulness of technical analysis is meteorology. I don't consider the TV weather report when I'm purchasing my clothes, but I definitely do consider it when I'm deciding what to wear today. Still, I always carry an umbrella. So should it be with TA. TA is not for picking where to put your money, it's just to help you decide when.
I have posted a few replies regarding “Is Technical Analysis Voodoo?” and have read just about all those posted. Including the numerous “where's the proof, where's the proof” stuff. I think TMF has done us a great service in opening up this “debate” and hope they will take the critical next step of routinely providing Fools with additional, objective information on TA. Maybe even a TA section of its own. Even if it is only links to sites that are dedicated to TA. Remember the mission EDUCATE, Excite, and have Fun. If I may, a few points about TA that seem to be “falling on deaf ears.”TA's basic premise is that stock price movement is not based solely on its management style and fundamental ratios, but rather by the relationship between supply and demand. That is why TAs evaluate charts, and that is why they combine fundamental analysis and technical analysis as a sort of checks and balance system to choose investments. Just because a company is fundamentally sound does not dictate or predict higher prices for the stock. Likewise just because a chart is developing a certain formation does not dictate or predict higher prices for the stock. Both merely help reduce the risk of making a poor selection.In order for the price of the stock to increase there must be more buyers of the stock than there are sellers at a given price. The reason those buyers exist, or sellers do not exist, may be caused by the attractive fundamentals of a stock, however, the fact remains that the only way for the price of the stock to increase is if demand exceeds supply. On a day to day basis, the fundamentals of a company are not likely to change drastically, but this doesn't mean that the price of the stock can not change. The price will change, and technical analysis helps to understand whether supply or demand is in control of these movements. This is why it is so important to look at both the fundamentals as well as the technical dataNo matter whether an investor is a long-term investor or a short-term investor, it is only appropriate that one identify the stocks that are fundamentally sound, and of those stocks determine which are technically sound and controlled by demand.Finally, there seems to be a stereotyping of TAs as “day traders” or “short-term” investors. TAs use technical analysis with thought and to help them identify when the powers of supply and demand may have shifted, indicating that a stock's price is likely to take a different direction. Case in point is March 2000, all technical indicators pointed to the Technology Sectors as being “overbought,” not a good time to be buying. Although it is hard to argue the sound fundamentals of the Cisco's, Nortel's, etc. of the world, technical analysis indicated an investor would be taking an unnecessary risk in buying these stocks at that time. Likewise, technical analysis was also indicating that this was a good time for profit taking. Those that had and reacted to this information were able to realize significant profits and either moved their gains to other more under-bought sectors or held on to their cash and will buy into the technology sectors on the next appropriate buy signal. In either case, compounding their returns. Tea leaf reading? Perhaps, but if all the leaves have changed their colors and are falling, it must be fall.Thank you TMF and please take the critical next step of routinely providing Fools with additional, objective information on TA.
Dear sosa58:I wanted to take the opportunity to respond to some of your comments regarding Technical Analysis. I agree with you that it is wonderful that TMF has opened the door to debate on the fascinating subject of technical analysis.You stated:“TA's basic premise is that stock price movement is not based solely on its management style and fundamental ratios, but rather by the relationship between supply and demand.”Yes, but let us take a little bit closer look at the supply and demand with respect to a particular stock. On the supply side, unless the company is buying back shares, issuing more shares in a secondary offering, issuing shares in connection with employees stock options (where the employee is buying and holding shares upon exercise of the option), issuing shares as a stock dividend or in connection with a stock split, or issuing shares in connection with a merger transaction, the supply of shares is fixed. So, with a fixed number of shares available, we can say that the changes in stock price generally relate to changes in demand for the shares. What is it that creates a demand for the shares? Many things but over a longer period of time it is the perceived economic benefit to be derived from ownership in the underlying business. (That is why, over a long period of time, there is a correlation between the movement of the stock price and the earnings of the company.) Now how should we go about getting a feel for the economic benefits that can be derived from ownership in the underlying business? The answer: Probably in somewhat the same fashion as you would if you were considering the purchase of a small business. You would engage in analysis of the business from both a quantitative and qualitative perspective. You would develop many questions that need to be answered to satisfy your concerns about the future prospects of the business. You would do this so that you can get comfortable that there exists a good probability for deriving favorable benefits from ownership. You would also evaluate whether you are getting something that is at least worth the price you are paying for it and it was worth pursuing a purchase. If the business opportunity did not look desirable in terms of the future economic benefits that it can potentially generate in the future, you would probably pass on investing in such a venture. In other words, your analysis for getting assurance of future benefits is part of the fundamental analysis process. Is there absolute assurance that if you did your homework on the business that it will not result in economic failure? No. There are risks of owning any business and you are making a “leap of faith” when you enter into such a purchase. Yes, there are speculators that simply buy stock on the theory that they will see a higher price offered for the stock even though it appears somewhat obvious that the stock is substantially overpriced at the moment based on a reasonable valuation of the company. This was evident for many technology stocks during 1999 and is often referred to as the 'bigger fool theory.”You stated:“The reason those buyers exist, or sellers do not exist, may be caused by the attractive fundamentals of a stock, however, the fact remains that the only way for the price of the stock to increase is if demand exceeds supply.”As mentioned above, over the long-term, the perceived benefits of ownership brings about demand and to evaluate the possibility of deriving future benefits is through fundamental analysis. Yes, you indicate that fundamental analysis is also useful to do in addition to technical analysis. Most of the technicians that I have personally observed do not conduct fundamental analysis.You mentioned:“On a day to day basis, the fundamentals of a company are not likely to change drastically, but this doesn't mean that the price of the stock can not change.” Absolutely! Simply fear and greed in the market can vary the demand for the stock. So do you want to join “the herd” and sell out too soon when the fundamentals and future prospects of the business still look very favorable and the stock does not appear to be overvalued in relation to your estimate of it's intrinsic value?However, you further state:“The price will change, and technical analysis helps to understand whether supply or demand is in control of these movements.”You sort of lost me here. As stated earlier, the supply of shares stays somewhat constant and the demand shift causes a change in price. So if we see a change in price, we know that relates to the demand side of it given that supply is constant. We concluded this without even doing one bit of technical analysis. If you want to see why demand may have changed, we might look at the news regarding the company to see if there are events that changed the perception of investors in the stock or those considering a purchase of the stock. Once again, no technical analysis was done to review the demand shift issue. If the underlying fundamentals of the company look attractive including the business model, we really should not be alarmed about short-term changes in stock price quotes. I am, of course, presuming that we are investors with a time horizon of at least 5 years for a stock investment.You mentioned:“No matter whether an investor is a long-term investor or a short-term investor, it is only appropriate that one identify the stocks that are fundamentally sound...” Absolutely, I agree with this statement 100%.You further state:“and of those stocks determine which are technically sound and controlled by demand.”You lost me again. What is technically sound mean? If the company is fundamentally sound already (i.e., has demonstrated steady and consistent earnings and revenue growth, high quality in those earnings without disproportionate increases in accounts receivable, inventories, etc., and the business model is sound), is that not enough for the investor who invests in a business like manner? By the way, as mentioned above, the stock price is controlled by demand in all cases which is a function of the business activity over the long haul.Towards the end of your comments, you mention the stereotyping of TA with regard to short-term trading activities. As I mentioned on this board, just about all the technicians I have watched, take the short-term view. As for taking profits on a Cisco or a Nortel, just applying fundamental analysis and doing a valuation made it clear that they were overpriced without having to do any technical analysis. And I saw value investors selling off portions of such overvalued stocks in the past year. No stock chart will tell a value investor what the intrinsic value is for the stock. Nor will advance/decline data, moving averages, volatility formations, volume indicators, and relative price strength rankings. You might be surprised at how low the intrinsic value is for some companies such as Yahoo! No stock chart of Yahoo! in 1999 will clue you in on what a rational value was for this company. Mr. Buffett closed down his investment partnership in 1969 when stocks were trading at very high prices relative to earnings. He did this without doing technical analysis. He simply could not find any reasonably priced investments and saw a bubble just as most value investors saw a bubble in the NASDAC index at the end of 1999.If you have not read it already, you might want to read TMFCheeze's commentary regarding “Adventures in Valuation 4” on 12/21/00 that is posted on the Cheeze-O-Rama board. There are some excellent comments about the two worlds – the price of the stock as perceived by the market, and the other world, the business itself. It is very insightful and filled with lots of common sense. In closing, here is an interesting quote made by Mr. Buffett back in 1990:“For some reason, people take their cues from price action rather than from values. What doesn't work is when you start doing things that you don't understand or because they worked last week for somebody else. The dumbest reason in the world to buy a stock is because it's going up.”Fool on,LeBeancountiere
...the supply of shares is fixedSupply refers to the number of shares being offered for sale at any given time and it is dynamic, as is demand for those shares.Simply fear and greed in the market can vary the demand for the stock.And it can vary the supply available as well. More supply than demand means falling prices.No stock chart will tell a value investor what the intrinsic value is for the stock.It won't give you a number but it will give you a relative measure of the intrinsic value. Just look at long term charts of CSCO and just about anything else. You'll immediately see that the market believes that CSCO has a high intrinsic value relative to the rest of the market...and that's really all that matters. The numbers won't help anyone. Market backing, on the other hand, can be most profitable. Mr. Buffett closed down his investment partnership in 1969 when stocks were trading at very high prices relative to earnings. He did this without doing technical analysis.Do you think technicians can't recognize overvaluation when they see it? The difference is technitions will be out when it becomes apparant that the market is beginning to react to those overvaluations. The LTBHer on the other hand, just sits through the devaluation phase. Mr. Buffett closed down his investment partnership in 1969 when stocks were trading at very high prices relative to earnings. He did this without doing technical analysis.Not to belittle Mr. Buffet's style or reputation, but as he is always held up as the classic LTBH, technicians would not still be sitting on KO as it represents "dead money" at best, or more likely a slow whittling away of assets. Techncians tend to see their assets as inventory that needs to be at work. Not in daily, weekly, or even monthly trades. But it does need to have a decent annual return. If KO is going to sit there for years, or dwindle, why not put that money to work elsewhere so it produces a return for you?rick
LeBeancountiere,You stated several times in your previous post that the supply of stock available is constant and therefore all changes in stock prices is due to changes in demand. You said:So, with a fixed number of shares available, we can say that the changes in stock price generally relate to changes in demand for the shares. As stated earlier, the supply of shares stays somewhat constant and the demand shift causes a change in price. So if we see a change in price, we know that relates to the demand side of it given that supply is constant. By the way, as mentioned above, the stock price is controlled by demand in all cases which is a function of the business activity over the long haul.This is actually an incorrect. Price changes are a result of changes in the demand and supply of shares. When I buy a stock, I am demanding shares. When someone sells a stock, he/she is supplying the market with shares. While the total amount of shares available may be fixed, the daily demand and supply of those shares is NOT fixed. Someone can buy a stock and decide never to sell it. In doing so he/she decreases the supply of shares available to be traded. Therefore a price change can relate to a change in the supply of shares (the amount being supplied to the market) without any change in demand. In fact, demand can increase and the stock price can go down if there are more investors supplying shares to the marketplace. If 1000 investors all decide to sell 1000 shares and no one wants to buy them, the price decline is not due to a change in demand (no one is demanding fewer or more shares than the day before) but a change in the supply available at that time.Towards the end of your comments, you mention the stereotyping of TA with regard to short-term trading activities. As I mentioned on this board, just about all the technicians I have watched, take the short-term view. Your comments here show a representation bias. You assume that just because the traders you have witnessesd are short term oriented, then most technical analysts are short term oriented. It's similar to a child believing most people in the world speak English because he/she grew up in America.So do you want to join “the herd” and sell out too soon when the fundamentals and future prospects of the business still look very favorable and the stock does not appear to be overvalued in relation to your estimate of it's intrinsic value?Sure, if the share price indicates weakness you may not know. What is technically sound mean? If the company is fundamentally sound already (i.e., has demonstrated steady and consistent earnings and revenue growth, high quality in those earnings without disproportionate increases in accounts receivable, inventories, etc., and the business model is sound), is that not enough for the investor who invests in a business like manner?No, absolutely not. You see, no matter how many balance sheets, income statements, and cash flow statements you read, no matter how often you speak on the phone with the CEO, and no matter how often you buy a company's products, you still can never know more than the people actually running the business. While you cant know what the most informed people know, you can see their actions in the marketplace. For example, when a company announces a major accounting problem that overstated its earnings, their stock will be destrotyed and you with it since you could have ever known about this error by reading annual reports or speaking with the company. But, if you take heed of the stock price, you can ascertain information from the actions of others; people who know about such issues and are trading on that information to profit (or avoid loss). The chart contains all known information about a company. Nothing else comes close. Conservatively Yours,Norris
Hi Rick:You made some good points and I am taking this opportunity to respond accordingly. When I mentioned supply of shares I did not also mention some further details such as restricted stock, stock held by certain insiders that may not be available for sale due to voting control or related issues. In the market over the past few years, yes, we saw what happens on a hot IPO where very few shares are initially offered and the artificial prices that are created as a result. And we have witnessed the drop in stock prices for many IPO stocks after the Rule 144 restrictions lapse or simply when many speculators leave the stock. We have also seen situations when a company with relatively few shares outstanding becomes very popular and the result to the stock price. Compare this to the amount of share volume for a company with a substantial number of shares outstanding like General Electric, Cisco Systems, or Microsoft yet the stock price may not change very much even with the substantial volume.Well, it has been around 27 years since I sat in a micro-economics class in college but I will try to work through these relationships. Looking at the upward sloping supply curve, we learned that there is a difference between movements along the curve versus a shift of the entire curve itself. Now if we have a shift in the downward sloping demand curve to the right representing a greater number of investors wanting to purchase shares, we can see that the price will increase even without any change on the supply side. That seems logical since there could be investors in a particular stock looking for a specific price at which they may be willing to sell their shares. So, on the demand side of things, the existing shareholders can be included with respect to their influence on the demand curve since they certainly might want to buy more shares, right? Similarly, current shareholders can include speculators (or should I say, short-term investors) that can suddenly not feel very motivated to hold their shares anymore simply due to a sudden drop in stock price or other cause for fear. My point is this: If existing shareholders in a stock are now selling, is this really any change in supply or is it actually a change in demand (they don't like their stock as much as they used to)? In the stock market, at a particular moment, there are shares available for sale as evidenced by sell orders in place at various prices. Don't we consider all shares outstanding that can be sold, without restriction of some kind, to be representative of the supply curve? In addition to the sell orders, there are existing stockholders with no sell orders open but they might be “on the fence” ready to sell some amount of shares they hold when the price is high enough. Anyway, the demand side of the issue is what I emphasized in my prior post. But, this really does not matter anyway! Looking at what the supply and demand was for a stock yesterday, and even if you were even able to represent it accurately with a graphic presentation, does not tell you what the price for the stock will be tomorrow or how the changes in supply and demand curves will look tomorrow.Your comment on “relative measure of the intrinsic value” is interesting since by your very statement, “It won't give you a number,” tells me that you agree with my statement (“No stock chart will tell a value investor what the intrinsic value is for the stock”). Value investors are interested in doing a valuation for a stock under consideration and coming up with a number and only buying when there is a margin of safety that is great enough to give them comfort to make a purchase. But, they need that number to start the process and a stock chart will not give it to them. By the way, a value investor does not care about buying the stock of companies with the highest intrinsic value either if the market cap still exceeds such amount as was the case for Cisco Systems for a few years until just recently.The point I made about Mr. Buffett closing down the Buffett partnership back in 1969 was merely to show that he did not have to do technical analysis to decide it was time to go out. In other words, he has somehow done very well without the use of technical analysis. It was not meant to prove something about technicians with respect to recognizing a downturn in the market.I am also entertained by your comment regarding Buffett's pick, Coca-Cola. Berkshire Hathaway originally purchased KO back in 1988 and 1989. Their tax basis in the stock is around $1,299 million and I believe they hold 200 million shares in this little company. So, after doing the division, we arrive at a basis of roughly $6.50 per share. With a recent stock price of $56 and change, it looks like a decent return over the last 12 years. But, what else do we have here? How about dividends of around 68 cents per share per year (for BRK, that is around $136 million of income per year). Remember, the stock has not been sold so no income tax on the appreciation until a sale is done. Meanwhile, in relation to the original investment of $6.50 per share, we have a dividend yield of more than 10% for Berkshire Hathaway. Maybe I am really missing something here but that does not exactly like “dead money” to me. How much dividends are you getting on your Cisco shares (I might be making a big presumption here since you mentioned Cisco). Since I have shares of Cisco, I can tell you that I have not seen a dividend check yet and I originally was purchasing shares back in 1994. I can tell you that there are some unhappy shareholders of Cisco that bought in last March and some of them feel like they do have dead money. Yea, yea, you might say, “Well, if Mr. Buffett sold the KO now, take the tax hit on the gain and park it somewhere else he could do better.” By the way, under tax law, C corporations do not enjoy the lower tax rate on capital gains as individuals enjoy. Mr. Buffett looks at selling KO as like trading away Michael Jordon when he used to play for the Chicago Bulls. Please let me know what the stock price of KO will be doing over the next 12 months so that if I do decide to buy some, I will know today whether or not I will be sitting on dead money. (If there are dead presidents on money, does that automatically make it dead money?) :)Enjoy and fool on,David
Hi Norris:Thank you for your commentary. Although I may not agree with you or several other passionate technicians, I have found that the technicians that I have met personally to be quite intelligent.Your first comment:“You stated several times in your previous post that the supply of stock available is constant and therefore all changes in stock prices is due to changes in demand.”With the exceptions that I indicated such as stock buybacks, exercised options where the employee elects to purchase shares instead of cashing out, secondary offerings, stock dividends and stock splits, etc., yes I did say that. And I thank you for reminding me that I said that. Please read my last post directed to Rick that further discusses my point.Looking at your comments, the he/she supplying the market with shares does not, in my view, defeat my comment about static supply as to the quantity of shares respecting a specific stock. If the price is great enough, many shareholders holding their stock tend to all of a sudden get interested in selling their shares. And this can be a movement along the supply curve rather than a shift of the supply curve. Sure, there can be those who do not sell just as there might be minority interests after an acquisition transaction of some type. Think about this concept, and it just might be conservative enough for your liking (I am conservative as well), some investors may actually sell their shares simply because their demand or their level of interest in the stock decreases (e.g., they may even see the stock they are holding as “dead money”). The 1000 shares example you used can relate to a change in demand for the shares by the shareholder(s) now wanting to sell the shares. As I mentioned on my last post, the existing shareholders enter into the demand side as well. Think of the shares as a tangible item and the comment I made regarding supply might make more sense to you. Unless I am really lost on something here, all of this supply versus demand discussion really does not help us at all when we are talking about investing. I only discussed it with regard to the commentary by sosa58 respecting the central issue that I have which is: What good is technical analysis as a tool for investors?I certainly grant you that my comments do have a representation bias. The technicians I have observed do conduct market timing activities. And I can provide you with numerous examples of commercial products, newsletter writers, etc. that will support my argument that many technicians do attempt to time the market. Now, did I say that every single technician does that? No, I may be Foolish but not completely stupid.In light of the last comment you made about how I have a bias toward believing TA is the short-term view with market timing included, I find your next response to my question about selling out with the herd even if the prospects of the business looking favorable very funny. Gee, you sound like a market timer.In your final paragraph, you are correct that no matter how much you may study a company, there is no absolute assurance that it will not result in a financial failure. However, I would rather go through the exercise of fundamental analysis before I invest than not doing so. I have dismissed many investments over the years because they did not leave me with a reasonable comfort level. I got a little news for you – the herd is not always correct so looking at only a chart to me is like playing poker without ever looking at your cards. What about the charts for many dot coms in 1999 as well as some technology stocks? I might be guessing but could it be possible that you are doing short-term trading activities? If that is the case, sorry, speculation just does not sound very conservative to me.Sincerely,David
> You sort of lost me here. As stated earlier, the> supply of shares stays somewhat constant and the> demand shift causes a change in price. Good morning, LeBeancountiere.I respectfully suggest that some of your arguments may be based upon an incorrect definition of "supply and demand".If XYZ corp has 1000 shares issued, then it's true that the total "supply", worldwide, is 1000 shares.However if I own 100 of those shares and my shares are not for sale (because I don't want to sell them), then for the purposes of "supply and demand", my 100 shares don't exist and the total supply is only 900 shares, until I change my mind.Thus, the total supply, far from being static, is quite dynamic day-by-day and has a different effect on the "supply and demand" price pressure than I think you are suggesting.Bo
> I respectfully suggest that some of your arguments> may be based upon an incorrect definition of "supply> and demand".And, of course, this is what I get for posting my reply before reading the rest of the thread. I see that my point has been much more articulately made by others.Sorry about that. ;-)Bo
Perhaps I am not a “true TA.” But, once again, I think my point is being missed. First of all, I never buy a stock without doing my FA first. Then, I look to the technical analysis to help me understand the stock's overall sector (sort of the “high/low tide raises/lowers all boats” syndrome) and to get an understanding of the stock's current pricing position and trend. If TA shows that supply is out pacing demand, then I may delay my purchase for a lower price and to see if price support changes. Market timing perhaps, but if there is strong technical support for a declining price trend (key word “trend”) then what is wrong with utilizing this information. That's my only point. In regard to some of your other comments, I can only presume that your FA skills are far more superior to mine and you don't need TA to explain stock price movements (and I don't mean that as a repartee). My personal experience has been that stock prices and the market in general usually begin moving long before I ever get the news (I guess I'm “out-of-the-loop”). So, TA has been a tool to help me better understand pricing trends and as a way to increase my probability of buying low and selling high. I believe, but am not sure, that it was J.P. Morgan who once said “I buy a little late and sell a little early.”I'm sure there will be plenty of LTBH investors who bought in the first quarter of 2000, who now have no choice but to wait until 2012 just to recapture their principal investment let alone getting the same returns that KO generated in the past twelve years. By the way, I am curious to know how KO shareholders ulitimately do decide when to sell their shares because without a sale they never make any money (unless of cause you're Warren with 200 million shares)? Anyway, I guess some of these first quarter 2000 buyers just erred in their FA and didn't realize that the stocks they were buying at the time were priced too high or the sectors they were buying into were in overbought territory. If individuals could accept the fact that TA is a tool and stop insisting that it is a crystal ball capable of pinpointing future stock prices with 90+% accuracy, I wonder if TA might have helped these investors see these circumstances before they made their final investment decision?That's all folks!Thanks again TMF.
David,The example of KO, I think, still makes my point. Not for Mr. Buffet as he practices and investment style that none of us can emmulate. How many of us are ever going to be acting in the scale he does, or dine with CEOs, CFOs, or sit on the boards of directors? And he has done very well with KO. That I do not deny.But for us small fry, the dividend for KO, at its current $56 and change, is earning 1.2% annually on the asset, while the share price (asset) has depreciated approximately 50%. I think most technicians would have been skeptical of the rate of share price growth leading to the high and would have exited as it broke through 72 in 1998. Let's pick 70 as the exit. Paying 20% capital gains, as it would have been a long term hold because it was well behaved until then, after taxes one's assets would have been worth $56. That $56 could then have been put to work elsewhere in all probablity earning far more than 1.2%. Continuing to hold would be returning the holder the dividend rate while the asset, from the chart, appears to be continuing its decline (it continues its trend of lower highs and lower lows:http://www.bigcharts.com/quickchart/quickchart.asp?symb=ko&sid=0&o_symb=ko&freq=2&time=12Now, if it could close over 65 then the situation just might be different as it would signal a change in market sentiment (reflecting some upside change in the fundamentals). Until then to me it looks like a worse than dead money situation.As for CSCO, I don't nor have I ever owned it. I've not been doing this long enough to have had the opportunity to buy at a price I considered reasonable. No way would I have bought it last winter as technically it was in a climax run (and I might add, I just couldn't fundamentally justify the cost...see, we TAers do use some fundies too).But as for needing a specific number for intrinsic value, this I don't get. The results of those calculations are based on long term assumptions which are, in the end, shakey at best. I would wager that intrinsic valuation calculations done on an annual basis will yield a different number each year. How valuable can that be? Unless of course one is to consider such calculations to be valuable in a relative sense. Which was my point...you can see from the long term charts of the winners that the LTBH community is always pointing to as examples of LTBH success, exactly the same relatively higher intrinsic valuations that the market has given certain companies. I don't need the number, just the relative valuation the market is pricing the stock upon.Bear in mind here that I am in no way attempting to state that one way is better than another. My point, and that of most of the others who have risen in defense of TA, is that the best of both worlds just might be the optimal approach. Fundies pointed to KO, as the technicals did when the market decided to mark it up. But the technicals said it was time to say thank you and move on. I do love a good exchange.rick
Hi Bo:I hear what you are saying on the supply versus demand issue. Think of it this way, if you are holding shares and you do not want to sell them and many others that own the same stock feel the same way, then you and the other stockholders have a very strong demand for your shares and will not let them go unless the price is very high. There is only a finite number of shares available at a point in time. Like I indicated in my prior post, if you think of shares as tangible property (such as artwork), then the supply related comments I made might be clearer. And I agree 100% with the idea that the demand for shares can change rapidly in a short period of time, in part, due to fear and greed.To sosa58:I appreciate your comment that you believe in FA as well. Although I am trained at reading financial statements being a bean counter (California CPA), I have been fooled by management of companies in the past as well. Nobody has hit 100% on good investments including the masters like Warren Buffett and Peter Lynch. The good news is that you can still be a very successful investor even though you do not hit 100% on investment choices made. As for KO, I see it pretty overpriced at this time based on the valuation assumptions I am using so as a value investor looking for stocks to add to my stock collection, I will pass on KO at this time. For long-term value investors, it is not only about being patient on holding stocks but also about being patient on when to buy certain stocks. Just like the example provided by Mr. Buffett – “waiting at the plate for the perfect pitch.” This is an area that gives us individual stock investors an advantage over the large institutional investors – everyone is yelling at the institutional investors to swing the bat. As I understand it, when money flows into an open end mutual fund, it is usually invested right away. Because mutual funds compete on bringing in investors and they have to jump through hoops on performance every three months, they usually are fully invested.To Rick:My comments above provide my view on KO as far as purchasing more shares at this time. I am pleased to hear that you did not buy CSCO last year, and particularly last March. I have followed the Motley Fools for quite some time and not until last February did I register. My first posts were on the Cisco Board at the beginning of March last year warning about overvaluation. Boy oh boy did those passionate Cisco investors jump all over me. The funny thing is the fact that I am a Cisco investor as well. I was merely saying that it does not look like a good time to buy shares (I was not saying sell your shares). There are some pretty smart people posting comments on the Cisco Board. Some were basicly saying, yes it is time to buy because it is as good as money in the bank! Excuse me, but the money I have in the bank (money market savings) back in March moved up higher (accumulated principal and interest) since last March but those who bought Cisco last March are not looking at a net increase in the total market value for the shares they bought last spring. By the way, I think that Cisco has become a good buy recently and I added shares to my collection.Besides being a bean counter, I am also a CVA, Certified Valuation Analyst. This is suppose to mean that I am qualified to do valuations of businesses (usually for buy-sell agreements, gift or estate tax purposes, and for certain other purposes). Most of the businesses that CVAs like myself do valuations for are closely-held businesses and their stock is certainly not publicly traded. When a CVA in a court room situation has to opine to the value of a business, guess what? It is a single amount. Now, believe me, I think it is kind of funny as well giving a specific number as the value for a business. As a value investor, I use certain assumptions and derive my estimate of what I believe the company might be worth. You and I might agree that a particular company looks like a good investment; however, you might have a greater aversion to risk than I do. As a result, you might apply a higher discount rate than I do if you are using an earnings or cash flows based approach to valuation. Therefore, my value for the business might be higher than your value. Value, like beauty, is in the eyes of the beholder. Yes, I do a sensitivity analysis of tweeking around the assumptions a bit to see the change in value. Now for the best part - even after the valuation is done, to give you a little more safety net, you look for a margin of safety (Benjamin Graham concept) just in case you were off the mark on your assumptions and data. The margin of safety exists when the going market price per share for the stock is lower than the intrinsic value per share that you arrived at in doing a valuation of the business. How much margin of safety is sufficient? That is a subjective matter because valuation is more art than science anyway.I have no problem that you and others than employ the TA approach wish to come to it's defense. Just as I come to the defense of value investing and use of fundamental analysis. Besides, it was kind of fun walking down memory lane on the supply and demand curves that I first learned in a micro-economics course so many years ago. I sincerely do not like to see individuals lose money from investing and that is why I sound out pretty strongly on some of my views.I enjoyed the exchange of ideas as well.To kingni:I loved your post – Different Views. Yes, we might all be similar in certain ways but we all see the world of finance through different colored glasses. Hopefully, my glasses are not so darkly shaded that I am not able to see and appreciate other points of view.Fool on,David
I have to admit to being a closet Chartist.I am an engineer, so I want the market to obey the laws of (non-quantum) physics. Like, F = MA. If a stock is going up, it has a mass and a momentum and it will take some really serious -F to slow it down. The problem is my open-minded (that was hard - I REALLY wanted this to work! I would be RICH!) research showed that if a stock had a mass at all, it was vanishingly small. The slightest variation in the F could cause startling changes in the value of the stock. And F was devilishly hard to predict, being the daily imbalance of buyers over sellers.I finally had to resort to my overriding philosophy of life: "I would rather be lucky than smart". The market is a random walk. Deal with it!Sincerely,theFATlat
Best Of |
Favorites & Replies |
Start a New Board |
My Fool |