A look at investing styles

Some investing styles are more promising than others. Consider, for example, fundamental stock analysis vs. technical analysis.

If you invest based on fundamental analysis, you study companies and assess factors such as their financial health, competitive advantages, management quality, growth prospects and profitability. You aim to buy stocks when they’re trading for less than their intrinsic value, using tools such as price-toearnings (P/E) ratios or discounted cash flow calculations. You understand that shares of a company’s stock represent a small ownership stake in a real business.

Technical analysts, on the other hand, seek momentum; they focus on charts and graphs of companies’ stock price movements and trading volumes, looking for promising patterns. They believe that pricing patterns repeat themselves and seek ones they believe predict growth. They ignore many factors that affect a company’s performance, such as its cash flow, debt load, growth prospects, regulatory environment, country of operations and so on.

Critics of technical analysis note that it’s based on mining data for patterns, and it involves a high degree of subjectivity.

While some studies have found some value in technical analysis, a 2008 study by researchers from New Zealand and Australia tested more than 5,000 technical trading strategies in 49 different country indexes, finding that none added value “beyond what may be expected by chance.”

Many of the world’s most successful investors — including Warren Buffett, Peter Lynch, John Templeton and Philip Fisher — use fundamental analysis.

If you want to be a successful long-term investor, consider sticking with fundamental analysis instead of engaging in technical trading.