It's All about Timing - Technical Analysis for a Value Based Investor


When do politics, comedy, acting and investing all come together? When the issue at hand is timing. The typical portfolio manager usually follows either a fundamental approach or a technical strategy when building their portfolio, but rarely blends the two. Is there a time when a value-based investor might at least consider looking at the technical performance of a stock over time?

The one common denominator for value investors and technical analysts is the desire to make buys and sells at the right time. Just like there is a good time to make the right move in politics, acting and comedy, there is a good time to make the right move in the world of investing.

Four Most Common Investment Strategies

Before we consider integrating technical analysis into a value based strategy, let’s look at the four generally accepted philosophies for creating a portfolio:

  1. Growth – Investors adhering to a growth strategy, select stocks they believe will out-perform others in the same industry or the overall market. They are less concerned about the underlying fundamentals of the company behind the stock and more interested in how the stock will perform in the future.

Although many say value and growth strategies are “diametrically opposed” to one another, none other than Warren Buffett says "growth and value investing are joined at the hip," and  Peter Lynch, pioneered a strategy called  "growth at a reasonable price (GARP)."

  1. Income – Income investors typically look for companies that pay dividends or may consider other investment vehicles besides stocks. Income investors may consider bonds, REIT’s (Real Estate Investment Trusts), rental properties, annuities, and other vehicles that provide income over time.
  2. Value – Value investors look at the business behind the stock, conduct fundamental analysis, and look for undervalued stocks in otherwise fundamentally solid companies where the true value of the stock is below the current strike price. The disparity is termed intrinsic value and value investors based their decisions to purchase stock in a business on objective cash flow calculations.
  3. Technical - Technical analysts don't perform any fundamental analysis and pay little attention to the underlying fundamental of the business behind the stock. They make decisions based on “patterns” over time. They analyze charts and monitor a stock’s performance or trends expecting the stock to follow the same trends over a specific time-period. Unlike income and value strategies that are more long term in nature, technical analysis is a short-term, active trading strategy.

Technical Analysis 101

Technical analysts study price movements to identify patterns that repeat over time. “There are three basic principles of technical analysis. Price Discounts Everything, Price Moves in Trends & History repeats itself.”

Monitoring charts and developing elaborate formulas, technical traders may hold a stock for a few days or weeks and some active traders may buy and sell the same positions multiple times in a single day.

Timing is the Common Denominator

According to Investopedia, both value investors and technical analysts “believe it is possible to achieve returns that beat market and industry averages.” There are, however, only a few managers, who follow a blended approach of the two strategies.

These managers believe that, used together, the two approaches can signal the most profitable times to buy and sell. In the market, as in comedy, acting, and politics, “timing is everything.” Check out how one of the most famous actor/comedian/politicians in history uses timing to his advantage.

A Timing Based Approach to Value Investing

So how exactly might a manager leverage the timing aspects of both disciplines? Never forgetting that a value-based manager will always look at the fundamentals of a company before making a move, there are times when a technical analysis can surface some good candidates for further investigation.

A screen designed to uncover stocks that meet a technical analyst’s criteria may surface an opportunity to complete additional fundamental analysis and convert what was originally designed to be a short-term play into a long-term buy and hold. It is always worthwhile to do the fundamental analysis on a stock to discover possible longer-term moves.

Making Money with the Blended Strategy

In the end, the goal of a value investor is to build wealth over time. There are times when even the most astute fundamental analysts miss stocks that fly under their radar. There are also times to optimum times to buy and the best times to sell. Understanding that the common denominator of timing works for both fundamental analysis and technical analysis can lead to solid opportunities to build wealth into your portfolio. 

Sometimes using technical analysis for initial screening and conducting solid fundamental analysis can produce opportunities for creating long-term wealth. It is always worthwhile to perform the fundamental analysis on stocks identified in a technical play and take advantage of diamonds in the rough that may not be readily apparent from fundamental screens.

The Value of Newsletters

A blended approach to value Investing is an interesting approach, but that is not why you are in business. You are in business to make money and build wealth over time. Timely newsletters that provide information about both technical analysis and fundamental analysis are a vital tool in your investment arsenal.

Most experienced investors subscribe to multiple newsletters. If there is a single place in the world where multiple opinions count, it is the stock market. For every opinion, there is a contrary view. A constant flow of diverse opinions helps you make good decisions.

There are many different kinds of newsletters available, and investors must decide which is most appropriate to their investment style. . . Multiple, independent and often conflicting sources of information are important if an investor is to reach the best conclusion as to the future course of the market and their investment portfolio.

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