Fundamental Vs Technical
By: Rayenda K Brahmana
Can we use it both? Yes! Which one is the best? Hm… Is it that hard to answer that question? Actually no! So, which one is the best? Hm…
Okay. In security analysis, there are two main valuations which are Fundamental and Technical. Technical analysis is a security analysis tool to predict the direction of security prices by its volume and historical prices. Meanwhile, fundamental analysis is a security analysis that claims ability to find the fair value of the firm. The question is still the same. Which one is the best?
Okay. Before showing which one is the best, here is the history of technical and fundamental. Technical analysis has been used since 1700s. Homma Munehisa, a rice merchant from Japan, is believed as the founder of candlestick chart. Further, Charles Dow is believed as the founder of modern technical analysis. If you love security analysis, Dow Theory must be remembered by you. Another technical developer is Ralp Elliot and William Delbert Gann.
In other hand, it is very hard to find when the first fundamental analysis had been conducted. The first merger occurred after the depression of 1883. In that time The Great Merger Movement was a predominantly U.S. business phenomenon that happened from 1895 to 1905. During this time, small firms consolidated with similar firms to form large. Even though in that time, there are no DDM, DCF, or other models, maybe the fundamental analysis is firstly used during the Merger Movement. Thus, DDM, DCF, RIC, and other models are introduced in 20th and 21st century.
Okay. Which one is the best? Hm…Before answering that question, I will introduce you to another important finding in finance area which is known as market efficiency. In 1900, Louis Bachelier, a French mathematician, found a Brownian motion in US stock prices. Then, in 1933, Cowels did the same research and found the same result that supported Bachelier’s work. Then, in 1970, Fama introduced the Efficient Market Hypothesis and classified the informational efficiency in three categories: weak form efficiency, semi-strong efficiency, and strong efficiency. In weak form efficiency, technical analysis can not beat the market frequently. If the market moves more efficiently to semi-strong efficiency, the fundamental analysis can not beat the market frequently. Does it mean fundamental analysis outperform technical analysis? Hm… Which one is the best?
Okay. Before answering the question, I will introduce to two strategies of investing, Passive Investing and Active Investing. Passive investing is a strategy that making time limitation ongoing buying and selling action. Passive investor has an intention of long-term appreciation. It’s also known as buy-and-hold strategy. Passive strategy must require good initial research and well diversified portfolio. Their main security analysis is fundamental analysis.
In other hand, active investing can be defined as an aggressive strategy where investor continuously monitors the market in order to develop profitable condition. Active investor use technical analysis as their security analysis. Thus, some times they use multiple screening as second opinion.
The facts show that the return of passive investing is outperforming the active investing. Another fact shows that active investing can not beat the market frequently. So, which one is the best? (I will put the table as soon as I know how to upload images).
Okay. Which one is the best? Hm… Before answering the question, I want to introduce several facts. (These are real facts. I got it when I was studying in UK in Dr. Ranko Jelic Class. After I know how to manage images, figures, and charts, I will put it all here. Promise you). First, Fundamental analysis beats market more frequently than technical analysis. Second, We must know the richest man in the world Warren Buffet. If I may add Peter Lynch who also fundamental believers. But from technical analysis? Hm….Hardly finds one who can beat Warren Buffet.
So, which one is the best? Fundamental or Technical? Hm…