Our war of words with a technical analyst

Nov 27, 2014

In this issue:
» Which countries are impacted the most by a fall in oil prices?
» Can the crude go to as low as US$35 a barrel?
» UBER overtakes Facebook in the valuation game
» ...and more!

Until a few days back, barely a day used to go by where we weren't asked as to why we haven't launched a technical analysis service yet.

Honestly, as dyed in the wool value investors, the whole idea of technical analysis was a bit of an anathema to us. It was literally beyond us as to how someone can give a call based mostly on historical price trends. And barely take into account fundamentals of the underlying stock.

But what was also true was the fact that there are perhaps a whole section of people out there who swear by technical analysis. Apparently, this art of investing has been in existence since ages. And is may be as old as fundamental analysis itself.

Besides, we could also not ignore the famous words of Charlie Munger. Once when asked to define what he meant by value investing, he simply opined that all intelligent investing is in fact value investing. Therefore may be it wasn't right on our part to simply call our style of investing as value investing. And term all the others as irrelevant.

Consequently, with this definition playing on our minds and also taking into account the demands from our readers and the business opportunity there in, we were cautiously optimistic when our friends at Profit Hunter decided to bring a technical analyst on board.

Apurva Sheth, the chartist, seeks to impress readers of the Profit Hunter with his trend and chart reading skills. And to be honest, we are looking forward to seeing what he has to offer.

In fact, the other day we went one step further... We reached out to Apurva to talk styles of investing.

Our point was clear... Stock prices are nothing but a reflection of the company's fundamentals. And therefore investing in the stock by ignoring the same is nothing but speculation as per us.

He on the other hand put forward a simple question:

Will you participate in a bubble knowing fully well that it is in fact a bubble?

Of course not we replied. Why participate in a bubble when one knows it is eventually going to burst and could lead to significant losses? Expecting this kind of an answer from us, he took no time in asking a following up question:

What if there is a process out there that helps spot the entry point just as when a bubble is about to form and also an exit point just when it is about to burst?

Well, even if there is a process, it still sounded odd to us as this is not the kind of moneymaking someone should believe in.

However, now just think about it. Does the market reward only the hard core fundamental investor or it rewards someone who spots consistent patterns in the way a market behaves and then places his bets accordingly? It is indeed the latter, isn't it. The market certainly has no time for lessons on morality or what is right or wrong. It simply rewards investors who have information, behavioural or an analytical edge over other investors.

The more we thought about this the more we realised that we were after all on not that strong a footing against our technical analyst (at least when it came to such short term movements in the market).

Our style of investing is certainly about not participating in the crowd folly but actually profiting from it. Thus, when extreme fear has gripped the crowd, we as fundamental investors try to profit by being greedy and also vice versa.

However, this is not to say that others cannot participate in a folly as long as they know it's a folly and have a process in place that helps them get in and get out just at the right time. And mind you, bubbles can last for far longer than anyone can imagine.

Thus, it struck us that our absolute objection to technical analysis was not that strong. And as long as one has a good process in place and also has a loss prevention mechanism, good money can also be made through this type of investing.

We are of course not advocating fundamental investors incorporate technicals into their investment process. We ourselves won't do it. After all, value investing in our view is the most rewarding form of investing there is. Why discard something that's tried and tested and that's working well for us for something we have no experience in?!

But yes, as we highlighted, Apurva may have a point and we will certainly see him pursue his process which he strongly believes in and is confident about. Besides, he also has a strong track record to back him.

Either ways, we know Apurva is going to make a big impact in the way short term investors pick their stocks. Stay tuned... we will keep you posted on his adventures in the stock market.

Do you think fundamental investors should stick to just fundamentals or should also incorporate at least basic technical analysis into their analysis? Let us know your comments or share your views in the Equitymaster Club.

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 Chart of the day
CNN's financial portal features an interesting article about the countries that are getting killed by cheap oil . As highlighted in the chart below, the oil price at around US$ 83 per barrel is woefully inadequate for all the major oil exporting countries if they are looking to balance their budgets. The worst off is of course Iran that needs a price of at least US$ 135 per barrel, a huge 63% higher than the price in question, if it were to come anywhere close to balancing its annual fiscal budget.

Saudi Arabia of course the least impacted but even then it will need prices to go up by 14% for its budget to balance. You see, with almost all the countries facing a budget shortfall at current prices, it does need a genius to realise that steps are probably underway to take the oil prices higher from here on. And in this context, the upcoming OPEC meet is indeed very significant we believe. However, with demand going down and with additional supplies in the form of shale oil coming on board, the multilateral agency really has its task cut out we believe.

Countries that are getting killed by cheap oil

Though OPEC meets are generally non-events in a stable pricing environment the one that is scheduled for today is set to be critical. With crude prices slipping to US$74 a barrel, a 33% fall since June, there are expectations that OPEC may cut the output to boost prices. However, it seems the organization is thinking otherwise and is in no mood to create artificial scarcity. The reason being - key OPEC members are flush with US$ 2.5 trillion of cash reserves currently. Hence, they do not see the current drop in prices to be material enough for them to act. Also, a meeting with non-OPEC producers held recently did not bear any fruits. This has further created a pricing deadlock.

So, if OPEC remains silent where will the crude go?

Well, if one expert named Tom Kloza is to be believed the price is all set to touch US$35 by the next year itself! This is about a 50% fall from the current levels. Weaker demand from China & Europe and strong contribution from the US shale reserves is the primary reason for an expectation of a fall in prices.

While the extent of fall predicted is debatable it will naturally benefit a country like India which imports majority of its oil requirements. Lower prices shall not only plug current account deficit but would also help in restraining inflation.

The ride from oil to IT story may not be smooth but customers that book their journey through UBER, a company that helps connect drivers and travellers via an app, are certainly experiencing smooth rides to reach their destinations. Because of these joyous rides the growth has been so explosive for UBER that it has already had 3 rounds of funding. And if the fourth round of funding goes through as planned it shall value the company anywhere between US35-40 bn. This valuation is much more than what social networking major Facebook fetched at a similar stage! Also, just in August the company was valued at US$18bn. A doubler in a span of 3 months speaks volumes about the irrational exuberance IT companies are witnessing now.

Probably, UBER's services are value added in a sense that it impacts our lives. Planned & hassle free commute is an added utility. What Facebook does is perhaps not as utilitarian. Hence, high valuations than Facebook.

But the speed at which the valuations have expanded is a matter of concern. And we know what happens when sanity returns. Think Facebook IPO. Or for that matter the Twitter one.

The Indian stock markets are trading flat today. At the time of writing the BSE-Sensex was trading up by around 8 points, while the NSE-Nifty was up 5 points. Losses were largely seen in consumer durable stocks. Most Asian stock markets were trading mixed. European markets too have opened the day on a mixed note.

 Today's investing mantra
"A phrase like "cost of capital" means different things to different people. We just don't know how to measure it. Warren's way of describing it, opportunity cost, is probably right. The answer is simple: We're right and you're wrong" . - Charlie Munger

This edition of The 5 Minute WrapUp is authored by Jinesh Joshi and Rahul Shah.

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22 Responses to "Our war of words with a technical analyst"

Ranjit Ganguly

Aug 15, 2015

The TAs r like the Astrologers: All the stars affecting to all the people alike, good and bad,both ways!! They,barring a few, just look like, deliberately, beating about the bushes!! They predict something on a particular stock, the next day the reverse happens! Obviously, though, the CHART,might be mattering!!!! The market is too sensitive to foretell. Investors need to be very cautious, overcoming all the impulses,if they do not like to go in drain! However your articles r very perfect practically and impressive.



Dec 5, 2014

Fundamental analysis tells us what to buy & what to hold or sell. Technical analysis helps us to determin when to buy and when to sell those stocks that we have listed after doing Fundamental analysis.



Dec 2, 2014

What to BUY has to be selected with Fundamental Analysis only. When to BUY can be decided based on Technical analysis and fundamental analysis both. Ditto for selling also. Between the two, Fundamental analysis needs to be relied more. I invest in this way.


N Ranganathan

Nov 30, 2014

Today, technical skills are very essential as many times, huge swing takes place in the prices and we need to encash such moves apart from retaining the value investing based on Fundamental Anaysis.



Nov 30, 2014

I've been a subscriber of EquityMaster for 8 years and in the past 2 years I've started to apply Technical Analysis on fundamentally sound stocks to time and exit stocks.
With Technical Analysis we can time entry and by using strict stop loss we can exit when the market is reversing or about to reverse. Without reading a chart it will be difficult to analyze this. Though it will take time to understand TA and to apply it on charts.
Even when stocks are considered as overvalued as per Fundamental Analysts the price keeps rising (for ex Plastiblends) and this is where TA will help identify trend exhaustion. I had tried to add this comment on Technical Analysis last year however it seems the moderator did allow the comment to be posted as it was completely against EquityMaster's ethics i.e., Value Investing :)
No hard feelings as I'd like to follow what suits be more and whatever opportunities the market provides me as it is my hard earned money that I'm placing in the market.


Vinod Jikadra

Nov 30, 2014

Technical analysis is a must.Remember how the famous Nicolas Darwas made his 2 million dollars on the stock exchange by combining technical analysis with his fundamental analysis. He developed a theory of techno-fundamental theory and succeeded in the stock market. Technical analysis gives you an entry & exit point. Even fundamentally strong scrips tend to remain sideways for years. example of Reliance Industries ltd. So technical analysis is a must.



Nov 28, 2014

any person who does not know both fundamental and technicals can not give good advise as they go hand in hand.



Nov 28, 2014

A holistic approach of combining both fundamentals and technical analysis is to be applied.A fundamental analysis using P/E,P/B and the product of these as explained in your Multibagger Stock Ideas Report to chose a investment scrip and using 15,30, etc dma's when to buy the scrip when it start moving above the dmas as can be obtained from the charts was used by me in identifying and investing in the shares. Recently, Canara bank,Cairn and Reliance Capital were identified for investment by me. The investors have to do their home work to follow this approach.


satish dabholkar

Nov 28, 2014

We have seen that in some of your recommendation, "Sell"for a particular scrip, as target is achieved,we noticed that stock price is still rising.Here I feel technical analysis will come in to picture.Here the investors who follow your sell advice will wait, to get additional return as indicated by technical chart and
will postpone the "sell" advices as indicated by fundamental analysis.
Pl start online lectures for Technical chart study for your members.



Nov 28, 2014

I concur with the view that there definitely needs to be a different view on the price of stock that you recommend , weather buy or sell . I am a subscriber of ValuePro , and I can tell you that you had identified excellent stocks , but did not give a buy signal, due to the margin of safety, which have since out run the stocks given with buy signals.
I think that technical analysis would definitely help in identifying the price of a stock to enter, and also perhaps book profits , and re-enter fundamentally sound stocks... after-all it is the stock price that matters , and I personally do not believe that the price in the stock market is a Correct reflection of underlying value ( esp in India!!) .. hence looking at trends of stock prices would definitely help in coming with buy and sell signals after the stock has passed thru the Value screen-er..

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