Re: Which one do you use? Technical or fundamental analysis
Realist said:
The second richest man in the world thinks so.
Infact it is impossible to buy an undervalued company any other way.
How could you buy an undervalued company if people like it and its stock price is going up?
A popular undervalued company is an oxymoron. There is no such thing.
No, the second richest man in the world definitely does not think so. Buffet doesn't simply buy stocks that are fair value or undervalued, then sit on them forever and a day in the hope their share price will come good.
What he's done for decades is buy companies that have great prospects but are currently struggling for whatever reason....usually because of poor management.
Having aquired the entire company, or at least the majority share, he then uses his expertise as a business man to pull the compnay into shape, make it lean mean and efficent so that it starts realising its potential.
This strategy is very different to that of an investor who buys a non performing stock because his assessment is that it's cheap or is fairly valued, then he sits on it sometimes for years, hoping that one day it will start rising.
This is the 'BHP' strategy....BUY, HOLD, PRAY.....and it's one of the main reasons that so many stockmarket players barely keep their heads above water.
A far better strategy is to only buy stocks that are already performing strongly, and to hang on to them only as long as they keep performing well.
To implement this strategy you don't need to concern yourself with fair valuation or any other form of fundamental assessment.
Nick Darvas started with a $3000 stock investment in 1952 and by 1959 had made more than 2 million dollars from the stockmarket. In todays values his 2 mill would be worth somewhere around 50 to 60 million.
For the first couple of years Darvas got nothing but frustration from his efforts to make moneyfrom stocks.
He bought stocks on tips from taxi drivers, waiters, and just about anybody else who told him that such and such was a great buy. He lost money.
He employed the industry 'experts' (brokers) to tell him what to buy. He lost money.
He did his own comprehensive fundamental research with the aim of assessing the value of stocks, and he bought those he considered undervalued. He lost money.
He was just about at his wits end, thinking that he'd never crack the stockmarket game, when one day in the quote pages he came across a stock called Texas Gulf Producing. He knew nothing about this stock...he simply noticed that its price was rising strongly.
Darvas thought to himself "What the hell...everything else I've tried has failed - this one might be worth a punt, at least it's going up.
He bought the stock, and his subsequent profits were enough to recoup more than half his losses of the last couple of years.
This was the turning point in the stockmarket career of Nick Darvas. His success with this stock made him question the value of examining company reports, studying the industrial outlook, the PE ratio, the Net Tangible Assets, whether or not the stock was fairly valued. He came to the conclusion that fundamental research was a waste of time.....the most important thing in selecting stocks was to buy only those that were already rising strongly.
Darvas put his new found discovery into practice from then on....rather than attempting to assess the fundamentals of a stock, he invested purely on the basis that a stock was strongly uptrending.
The rest is history.
Bunyip