C.ky Series 1 : Grandmother's Advice

Sharing the same objective of encouraging my readers to incorporate Fundamental Analysis (FA) in their investment decisions, my mentor has decided to contribute an article, mainly to highlight the importance of FA in evaluating an investment opportunity.

My mentor had successfully completed all three examination levels of one of the Investment world's most sought after qualifications, Chartered Financial Analyst (CFA) at a youthful age. An individual highly passionate in exploring the frontiers of the Financial world and has over the past 20 years been actively involved in investments of all major vehicles, such as stocks, bonds, real estates, commodities, currencies and derivatives. As the apprentice, I feel privileged to have benefited and learned extensively, particularly in the areas of FA, which my mentor uses all the time, to solidly support all the investment decisions made.

Although we differ in our main approach, we have a common goal - to become a Sophisticated Investor (SI). I hope my readers would benefit much from my mentor's contributions, as much as I have had over the past 7 years.

My mentor writes,

"Grandmother’s advice: Cart alone, has no horse power. Don’t put the cart before the horse.

Often people said, you are either a fundamental investor or a technical investor.  I, choose to be both. However, I am of the opinion that we should check the fundamental first, before using technical to enhance our return. It’s always dangerous to just purely rely on technical analysis alone.

Let me put into an analogy the danger here. You were looking for a house to buy. There was a house that was put in the market for sale at a price way below the market price of other recently done transactions in that area. You believed that the price won’t get lower than that already attractive price (trend). And you heard from the broker (chart) that there were other people showing interest in the house (volume). So you said, “This a good sign.”  You quickly jumped into purchasing it without checking the fundamentals because you thought the price has reached the lowest and other people were also showing their interest. After you have purchased the house, you discovered that there was a murder in the house! That is why it was selling so cheaply! 

Trading shares by using technical analysis alone is akin to buying the house without checking other factors beside prices and other people’s interest. This other people may not have heard of the murder too.

Always check the fundamental first, such as the economy outlook and industry outlook (which may affect the capital gain of the shares = house value appreciation), the earning prospect of the companies (earnings / dividends = rental potential), type of industry (booming or declining = location), intrinsic value of the company (interior of the house) and other contingencies or issues that can affect the fundamental existence (perhaps a murder case!). Once we are satisfied with the fundamentals, let the technical play starts.

If we have bought a good house at a good location, and the price dropped after we have purchased it, why worry? We can still enjoy the rental and if the price rose, we can take profit and wait for next opportunity. So, it is the same here, buying into fundamentally strong stocks can give us a peaceful, good night sleep.

Technical analysis tells us when to buy and when to sell, to enhance our return. Fundamental analysis tells us what to buy and what not to buy, to reduce the risk of loss. So, always check the fundamental first. Don’t put the cart (technical analysis) before the horse (fundamental) and remember, cart alone, has no horse power.

Contributed by C.ky who wishes to honor the memory of C.ky’s beloved and respected grandmother."