By Peter Mastrantuono
When it comes to security selection investors commonly rely on either fundamental stock analysis or technical stock analysis. Because each approach is so different in the factors they consider for what will drive the price of a stock, many investors view these approaches as mutually exclusive.
In reality, investors could benefit by employing both fundamental analysis and technical analysis to discover, evaluate, and determine attractive stock buying opportunities. Before we discuss how these two distinct approaches can be used in concert, let’s first review the basics of each.
Fundamental Analysis Basics
Fundamental analysis uses two broad inputs to determine a stock’s relative valuation. It looks at economic conditions, such as where we are in the economic cycle or the direction in interest rates and specific company data, e.g., revenues, earnings, future growth prospects and return on equity, to determine if the stock is fairly, under or overpriced.
Fundamental analysis is not limited to just quantitative inputs; it also considers more subjective, qualitative inputs, such as brand-name recognition, the quality of its management team, and market competitors.
Fundamental analysis is usually associated with long-term investors.
Technical Analysis Basics
The underlying principle of technical analysis is that all the fundamental data are already reflected in the price of a stock. Since technicians believe that price movements are not totally random and tend to move in a trend, the more productive analysis is to examine the stock’s historical price action to better understand where the price is headed.
Technical analysis studies price charts, focusing on moving averages, determining support and resistance levels and looking for evidence of price momentum. Technicians also evaluate inputs such as buying or selling pressure and relative strength to a benchmark.
Technical analysis is usually associated with short-term traders.
Becoming An Ambidextrous Investor
Let’s begin by acknowledging the obvious: Stock investing is an uncertain enterprise, and all stock analysis approaches are imperfect.
That said, investors shouldn’t be shy about using all the tools at their disposal to uncover good investment opportunities or to confirm their own analysis.
Here are a couple of ways to combine the use of fundamental and technical analysis to improve the stock picking experience.
Leslie, an experienced investor, primarily relies on fundamental analysis to select stock investments. She’s done extensive research on Lorax, Ltd. and believes it has a promising future. Before she decides to execute a buy order, she wants to see what the technical charts look like since she appreciates that technical charts often have insight into investor sentiment that can inform her if now is a good entry point for the stock.
Gavin recognizes that his fundamental research takes a lot of time and energy, so he wants to narrow his focus to the best candidate investments. One way he does this is by looking over price charts to identify companies whose price trends are particularly propitious. Once identified, he will then look at the fundamentals to make sure the company is not simply a short-term trading opportunity but represents a solid long-term position.
Investors shouldn’t feel alone when making big investment decisions. An experienced financial advisor’s access to data, market experts and third-party research can serve as an invaluable resource for making smarter investment choices.
Peter Mastrantuono is a contributing writer to MyPerfectFinancialAdvisor, the premier matchmaker between investors and advisors. Peter worked for over 30 years in the wealth management industry, focusing on retirement planning, investing, asset allocation and financial planning.