Deep-Value v Technical Analysis Investment

Deep value investing

 

A year or two ago one of Australia’s most highly respected “deep value” analysts and investors stated on the Sky Business channel that he had at that time been only able to find a half-dozen or so stocks that met his criteria for investment.

This is mentioned not to criticize but to note that the more highly selective we are in our stock choice by excluding those that are likely to be risky and less profitable, the fewer the stocks that will stay on our radar.

I regard “deep value investing” as being the premier pathway to safe investing. It is time-consuming requiring rigorous attention to fundamental detail, and if possible an evaluation not only of the balance sheet, but also assessment of corporate strategy, competition and managerial skill.

Value investing in its ultimate manifestation as practised by Warren Buffet, is interventionist, It seeks to own the business, and to supervise its operations with carefully selected imposed management. It is a formula for out-performance, not attainable by retail investors.

Value oriented funds may not be able to own the businesses in which they invest as Warren Buffet does, but they are likely to be active at board level, to secure the best decision-making for shareholders. As a result they are often among the best performing of the managed funds on offer each year. Despite usually charging a higher management fee such funds will usually reward their investors  handsomely, whilst offering above average security of their capital.

 

TheTechnical Analysis Alternative.

Very few retail investors have the time and industry of the fund managers to knowledgeably research the market looking for suitable investment opportunities. Many rely on stock-broking and analyst advice to help them to decide in which stocks to invest.

For others technical analysis appears to offer a quicker, and simpler option. I say “appears” advisedly as technical analysis is a tool that also needs to be studied carefully to be most effective. It is not fool-proof. It does not predict with any certainty. It is just another avenue of information discovery, based on market sentiment and behaviour.  Markets more often than not, are not correct assessors of company worth. For this reason it is important when possible to take into account strategic fundamental facts.

For me the value of using technical analysis is threefold:

  • the diligent Chartist can match the most suitable of an array of possible strategies for that particular stock. Having selected both stock and strategy, 
  • set attainable targets, and estimate a reasonable time-frame for the share-price to reach the set goals.
  • set milestones for the stock-price to reach, and to use them as a guide to stop-loss selling, or to increase one’s holding.

The major advantage of using technical analysis is in opening up a whole new dimension of investment opportunities. in which one is no longer constrained by present market profitability. Instead the hunt includes stocks that have new business horizons, growing revenue, and above all, for stocks that for one reason or another capture the public’s imagination.

The range of stocks in which one can invest may be enlarged, and the potential for profit enhanced, but at the cost of increased risk. It is your choice.

 

Stock-picking

The task of finding suitable stocks for more detailed evaluation has been greatly assisted by computerised scanning. For some (including oldies such as myself) scanning isn’t such an easy task, requiring skill, timing and effort that may be difficult to muster. Interpretation can also be complex, and it may be hard to choose between alternatives.

For years I have tried to follow the motto to “Neither give nor accept market tips” but I have gradually realized that the suggestions of others can be a wonderful starting point for my research. Over the past year and a half, many of my most valuable leads have come from the Traders’ Community Website, “Ten Bags Full”, and its contributors.

 

Don’t be a “one-trick pony”

There are many trading strategies to suit almost every conceivable temperament. I believe that investment will be more successful over the long-term if multiple strategies can be incorporated into one’s investment repertoire.

Examples of some successful strategies include

  • Trend trading in which you aim to enter an existing trend.
  • Momentum trading – seeking to capture mature trends with enough momentum to continue in the same direction
  • Break-out trading
  • Gann swing trading
  • Support and resistance trading; and over –bought and oversold trading.
  • Scalping with gearing. Look for evidence of intra-day volatility.
  • Arbitrage differences if you are clever enough
  • Follow the leader based on leadership talent.
  • Reversion to the mean trading.
  • Merger and acquisition opportunities.
  • Look for opportunities for stag profits in IPO’s
  • Dividend stripping, and dividend sacrifice strategies.
  • Market activity strategies e.g. “Sell in May and go away”.
  • “Scattergun” investing. i.e. buying a basket of shares with the prospect of only one or two being outstandingly successful to compensate for losses.
  • Targets from Gann cyclical highs.
  • Sharp spikes up or down in the share-price are excellent opportunities to take profit or to adopt a contrarian position.

 

 

 

 

 

 

 

 

 

 



Categories: Chart Analyses, Investment, Technical Analysis, Trading opinion

2 replies

  1. Absolutely brilliant Article Ken – many thanks.

    Erik Metanomski

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