The greatest risk of classic fundamental analysis to investment is INFLEXIBLE and marrying one's opinion to the stock or investment. The so-called fundamental investors are market BULLS. These bulls will make money when market prices go up. PERIOD! I have yet to come across such bulls cutting losses. As long as the long term trend is UP, mid and short term volatility is a non-issue for these bulls.
The biggest problem arises when the macro trend has changed to the ignorant fundamental bulls (since they don't believe trend exist) and they will marry these investments only to see investments diminish in value.
It is not easy for such bull investors to incorporate trend analysis into their investment since the concept of charts is such a taboo.
However, it is more likely a trend trader incorporate basic financial analysis into the technique and there are trend traders who do not use financial analysis.
More often than not trend trader are ridiculed as voodoo practitioners. If there is one thing I discovered over my years in stock, commodities and currency markets, prices will move up and down in a cycle irrespective of the fundamentals. Riding on the wrong side of the macro trend will only lead to abyss.
What both schools agree upon is there are some sort of "over + under" added valuation to fundamentalist and "over" added to bought or sold to the technicians. In a super bull, stocks can remain over-valuation and over-bought for a long time. In a super bear, stocks can remain under-valuation and over-sold for also long period.
Fundamentalists who sold simply because it is over value only to see prices explode to the roof fail to understand super bull. On the reverse, buying simply because it is deemed under value and realize prices fail to hold due to super bear trend. The same applies to technicians who sold because the view is over-bought and prices continue to gain higher ground. Not to forget such traders also buy because it is over-sold however prices continue to decline due to super bear trend.
No comments:
Post a Comment