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:
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.