A veritable war of words has been waged as long as stocks have been traded over markets. This war always seems to center around which type of investment analysis provides best results. Essentially, the combatants fall into two camps: technical analysis and fundamental analysts. Technical analysts believe that they can forecast future price movements in securities by studying past data, essentially ignoring the nature of the underlying company, which fundamental analysts prize as the key inputs into their trading decisions. Both camps have data and history proving that their techniques are most profitable. Needless to say, most investors would benefit from incorporating both fundamental and technical analysis into their research processes.
Technical analysts, or “chartists”, tend to favor price and volume as key inputs into their trading decisions. They pour over historical charts of securities to plot their next moves. By looking at a chart, a technical analyst claims to see the underlying investment sentiment behind the stock. By finding patterns centering around price movement and volume, technicians can imply what the next move in the security should be. A recent study by Irwin and Park found a majority of studies on technical analysis have found that it produces positive results, though doubt was cast on the veracity of the previous studies’ methodology and data sets.
Much of modern stock research published by investment banks utilizes fundamental analysis, a tool taught in mainstream business schools. This type of analysis consists of looking at a variety of company specific factors, like sales growth, net income and then layering valuation metrics like price to earnings or price to sales to evaluate how a company stacks up to its competitors. While more widely accepted academically than technical analysis, fundamental analysts don’t particularly have a tremendous track record backing their methodologies. While a few fundamental analysts like Ken Fisher and John Neff have consistently beaten the market over the long term, most analysts don’t, weakening the case for fundamental trading.
Instead of taking sides in either camp, many contemporary hedge fund and mutual fund analysts use a combination of both techniques when deploying funds. These investors use screens to filter out stocks according to one methodology. With these stocks in hand, investment researchers then begin researching the securities in question according to the other methodology. Frequently, this means screening according to fundamental factors and then timing purchasing or selling securities according to technical analysis. Either way, investors with both skill sets in their investment toolbox should reap the benefits.