Another sensational headline

Motley Fool are masters of the sensational headline; case in point: their blog shouts Avoid the Mistake That Cost Buffett 8 Years of Better Returns, which turns out to be a reasonable discussion of technical analysis v fundamental investing a la Warren Buffett:

Technical analysis is the practice of predicting where stocks will trade based on charts of historical pricing and volume information. There’s a certain logic to it. Stocks trade based on supply and demand, which is greatly influenced by investors’ attitudes about the stocks. The charts should reflect those attitudes and might predict where the individual stocks will go.

But Buffett discovered one small problem. Technical analysis didn’t work. He explained, “I realized that technical analysis didn’t work when I turned the chart upside down and didn’t get a different answer.” After eight years of trying, he concluded that it was the wrong way to invest.

So, what does Warren say is the right way to invest?

Well it would be unfair of me to steal Motley Fool’s Thunder [ AJC: see I, too, can write clever headlines 😛 ] …

… instead, I want to point you to an even better strategy for small-time investors who can hop in/out of positions far more nimbly than Warren Buffett:

Combining value investing with basic technical analysis as touted by Phil Town of Rule # 1 Investing ‘fame’. Phil reportedly turned $1,000 into $1,000,000 over 5 years using these strategies, so maybe you can, too?

I didn’t have this same kind of success (with stocks!), but I did only start to use these strategies as the market crashed 50+%, yet my loss (including doubling my risk by using margin lending) was a 15% loss in the US (on approx. $1,000,000 invested) v a 60% loss in Australia (on approx. $750,000 invested) and a 80% loss in the UK (on approx. $3,000,000 invested) where these techniques were NOT used.

Before you say “what a dope”, my UK ‘investment’ was actually part of my buyout, so I had no choice … but, Australia and US were my [stupid!] decisions to invest at the peak 🙂

So, a 15% US loss should actually be read as a 35% ‘gain’ over the market, thanks to these tools …

Here’s what Phil Town has to say about sticking to his technical analysis-based buy/sell signals:

For all you arrows users (Investools or Success): I buy with three greens and it’s amazing how many times I regret it when i jump the gun and buy with two.  So three green.

And I get out when the stock stops going up and I get two reds down below.

And, here’s how to combine the two:

– Select a stock based upon sound fundamentals: i.e. is it trading below its long term value?

– Buy when the ‘technicals’ tell you that the major fund are beginning to buy in and sell when they are beginning to sell out.

IF this works for you (and, it has worked pretty well for me), it allows you to rid the short-term ‘waves’ in a stock’s price …

… but, you sell out for good, once your ‘value analysis’ tells you that the stock is no longer cheap.

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0 thoughts on “Another sensational headline

  1. Adrian, do you subsribe to investools? If so, how much of a time investment did you make (I understand they insist on new members attending classes), and how much does it cost per month/year?

  2. @ Josh – This is a sore point, resulting in me talking to their CEO (a very nice guy, by the way). But, yes, I am (was) as member but never got around to doing the classes … oops!

    I just use MSN Money; if you click into Phil Town’s blog post, these ‘free tools’ are just as good but you need to eyeball three lines crossing over (no biggie, if you ask me) and they actually may trigger you a little earlier than Investools will.

    No biggie, if you ask me.

    Also, a new member of pointed me to this site that purports to do the Rule # 1 calc’s for you (to identify a target stock … you still need the 3 tools for buy in/out signals); at some stage, I will check it against a couple of stocks that I have manually calculated, but for now I provide the link without having vetted it for accuracy in any way 🙂

  3. Adrian, that site is AWESOME!! Thanks for the link. I’ going to run my own numbers to check the math, but if it’s close….

    I almost feel guilty using it because you can run the numbers so fast.

    Thanks again.

  4. @ Jeff – Please let us know how it checks out; it could replace my wonderful – albeit clunky – homegrown Rule # 1 spreadsheet 🙂

  5. Adrian, great info. I think these kind of indicators aid in some ways. I just think it’s important to avoid 100% reliance.
    I use google finance a lot, and have found opportunities using their stock screener. Added the site to my favs, def will check it out, thanks.

  6. @ Josh – I think that the point of Phil Town’s comment is TO use 100% reliance i.e. to get out when the Big Boys do … he says that he has usually regretted it when he hasn’t waited for “three greens” (100% go) or ‘three red’

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  8. Adrian,
    I would be very skeptical that technical analysis works- here is a link discussing the controversy:
    I’ve never heard of anyone getting very rich from technical analysis. Plus neither Peter Lynch nor Warren Buffett believes in it.
    A web site that tells you when to buy/sell stocks strikes me as too good to be true. Let’s say that you had a stock purchasing system that WORKED- would you
    A Make it available to the world on a website/write a book and make $1M
    B Keep it secret, start your own hedge fund and make $1B.
    I’m guessing A wouldn’t be too likely… Also if you did have a system that really worked then making it widely known will cause the system to be useless. Why? For every transaction there must be a buyer and seller. If many potential sellers see a “buy” signal at the current prince they will demand a higher price to sell driving the price up. Similarly, if many potential buyers see a “sell” signal at the current prince they will demand a lower price to buy forcing the price down. The final result is that the pool of believers in the system will force the actual price to agree with the system’s prediction of a fair price.

    -Rick Francis

  9. @ Rick – Great comment and actually, I tend to agree with you; remember, though, that there have been successful traders, but none that I know of with longevity; it’s a speculation / business … so, if you are prepared to take the chance on the big run up – then sell off – PERHAPS, just perhaps, you can make it big? Jesse Livermore did it 4 times (before putting a gun to his own head when he crashed for the 4th time). On the other hand, buying/holding income producing assets is a much surer long-term plan for success …

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