During my sharing, it is a common question I get from the audience, “Do Value Investors look at chart?”
The truth is… I don’t know really. But since I used to look at charts and use technical analysis before I learnt about Value Investing, I would like to share my personal opinion.
Looking back, looking at charts gives me a snap shot of how the market perceive the price of a particular stock. So how is that useful? Well, I think it can sometime help create a better entry and exit price when the technical analysis works. But purely using technical analysis without knowing the fundamentals of the business is dangerous. It is like trading on thin ice. But with a strong fundamental understanding of the stock and knowing that it is a fundamentally sound stock, will help give a solid foundation. There is a reason why fundamental analysis is called fundamental analysis.
So using an example of buying a 2nd hand car.When you use fundamental analysis, you are examining the car, and testing to make sure it is a good car. You look at the engine, the mileage, the year it is made etc etc. You want to make sure it is a good car. Then you also establish a good price you want to buy the car given the condition of the car. But if it is not a good car – say it is very accident prone and has very poor engine, you wouldn’t want to buy it right?
After you establish, you want the car and the price you want to pay, you can begin to bargain below your target buy price, hoping to get a even better deal. This is where I see technical analysis coming in. Value Investors, may establish a price and buy when price is below the target price, regardless if the price is up or down trend. But technical analysis can show you the trend.
So the price of the car is dropping and it continues to fall. So you may have noticed that and will be willing to wait until the price bottom out and start to rise in price a little. (Well… no one gets to guess the bottom accurately all the time… no one).
But imagine, you just use price trend to determine when to buy a car without even checking the fundamentals of the car. You are then just hoping that you can buy the car cheap and hope that another dude will come and pay you more. Isn’t that so much more riskier? In my opinion, it is very risky buying something you did not even check.
So do i look at charts? Well, i do not actively check charts. To me, i prefer investing to be passive and based on my experience, using charts works at times and does not work at other times. Perhaps I am a lousy chart-looker, but the effort to try and time the market is not very rewarding. I rather spend time with my family and doing other things that matter in life. 🙂
Of course, this is only my opinion. What is your?
Mind Kinesis Research Team