Technicians vs. Fundamentalists

As I mentioned earlier, I want to write a little about this whole idea of technical analysis vs. fundamental analysis. Technical analysis is defined simply as the use of price action alone, without regard to the underlying facts of the business or commodity in question, as a way to make decisions about buying and selling in the marketplace. Fundamental analysis, then, relys on the relationship between underlying information about the business itself--balance sheet, income statement, cash flows, etc.--and the price, to make buy and sell decisions. Put another way, technical analysis usually means that if the price goes down, you would sell, whereas fundamental analysis usually means you would buy more (since its a better bargain).

I think both technicals and fundamentals can work (or not work). Again, as I mentioned in the previous post, I think the real issue is having a thesis, and most importantly having a plan for what will make you decide that your thesis is wrong. I think the beauty of the technical approach, if you have good discipline, is that if the stock moves against you, you get out and preserve your capital for another day. In the fundamental approach, its fine to "average down", but again you have to have a plan ahead of time--will you average down to zero? What if you are wrong and are left with worthless stock? Will that cost you a significant chunk of capital?

True fundamental story--a few years back there was a small chain of home improvement stores called Home Base--kind of like Home Depot. The stores themselves weren't bad. The stock was in the toilet, and selling for less than the cash and assets on hand--the breakup value of the company, presumably, was worth more than the market capitalization. What's more, the CEO bought a huge block of stock in the market with his own money (not cashing in options). How could you lose--a classic Ben Graham/Warren Buffett cigar butt, with heavy insider buying. By now, you know the rest of the story--company tried to re-engineer themselves, spent their cash, and went bankrupt. You can always be wrong.

Bottom line, sometimes I buy/sell on the technicals, sometimes on the fundamentals, but I always have a plan ahead of time.