Technical Analysis vs Value Investing

**nodoodahs** Sat Feb 11, 2006 3:32 pm

Not a very good discussion IMO. It may not have worked for you, doesn't mean it doesn't work in general or for some specific person.

Here's what I've written on the subject, in reverse date order (recent first).

http://nodoodahs.blogspot.com/2006/02/momentous-idea.html
http://nodoodahs.blogspot.com/2006/02/fundamentals-technicals-and_07.html
http://nodoodahs.blogspot.com/2006/01/golden-telecom-golden-times.html and don't forget to see what happened to the price after I made that post.
http://nodoodahs.blogspot.com/2006/01/technical-analysis-and-value-investing.html
http://nodoodahs.blogspot.com/2005/12/problems-with-value-investing.html

**blast_investor** Sat Feb 11, 2006 4:12 pm

Hi Bill:

Very nice articles on your web site on this topics.

Actually, I would agree with you on the problems you pointed out for value investing, mainly:

Momentum and peaking.

You also provided your solution to above value investing problems, which is technical analysis.

Let's look at the problems first, the problems are not new or unknown to value investors. Any real value investing pro should know that. My point is that, not only value investors know that, value investing itself has a solution for the 2 problems you provided.

(1) Momentum problem is really called "catalyst" in value investing. Value investing has changed so much from original Ben Graham's days. Nowadays, it is very hard to make money for cigar butt approach of original Ben Graham style value investors who do not pay attention to this issue. But new value investors including Warren Buffet, Michael Price, Joel Greenblatt all use "catalyst" to address this momentum issue. I consider "catalyst" too for my newsletter practise as well. Merely sticking with old NCAV style method is not going to work very well.

The "catalyst" can be very broad. Merger, spin-off, future events even Wall Street road show or future earning upside surprise would all count.

(2) The second problem "peaking", is even simpler problem to solve. Ben Graham already provided the value investing solution to solve it. The method is called "average PE" method over past many years. The idea is to look for earning over past many years, even decades and then averaging out to get an average number.

This averaging method would averaging out the "peaking" issue. True talented value investors would not easily buy a stock merely on PE. Only inexperienced investors would get trapped into low pe "peaking" stocks.

I have applied the value investing solutions to the problems you pointed out successfully over past many years. In my opinion, the problems you brought out are valid, but value investing does have a solution to the problems.

**blast_investor** Sat Feb 11, 2006 4:24 pm

Having said above, I am open minded to technical analysis too if it indeed can solve the 2 problems you mentioned.

Again, technical analysis itself is not as solid as value investing. This is very clear from the history of US successful investors.

I can name numerous billionair value investors: Warren Buffet, Ben Graham, Joel Greenblatt, Michael Price, Edward Lambert.

But I do not know the names who made billions with Technical Analysis in USA.

**blast_investor** Sat Feb 11, 2006 6:24 pm

One interesting part in your article is that "there are quite lot that make a living on Technical Analysis".

This is actually true. But again, to make a living, there are 2 ways, one is the return from investment, another is fees from selling newsletter, books, charts, etc.

There is nothing wrong to make living from "selling newsletter, books, charts". I sell newsletter and make money out of it. But ultimately, the success of a method is determined by annualized return of model portfolio for newsletter, or by annualized return from hedge funds or mutual funds.

To prove a method work or not, this annualized return test should be applied to any kind of method. Ultimately, whether an investment method is successful or not is judged by investement result, or annualized return.

For value investing, that is very clearly laid out in past value investors' performance.

On this "annual return" test alone, value investing is far superior to any other kind of methods. This can be proven by Warren Buffet 20% return over past 50 years, or from 40% return from Joel Greenblatt over past decades. My own past record is another proof.

No Technical Analysis guru I heard of achieved what value investing gurus have achieved so far for the long run.

**blast_investor** Sat Feb 11, 2006 6:47 pm

Here is statement on your web page:

"Is technical analysis foolproof? Of course not. But then again, neither is the magic formula, or the cigar butt method, or the Buffett method, etcetera."

I would dissagree with this arguement above. Return from magic formula is on paper only. Not even Joel Greenblatt used that exact formula for his own fortune. But Joel Greenblatt investment record was real and he made it with 40% return with value investing method.

We know Warren Buffet is billionair, so does Eddie Lambert. Joel Greenblatt is worth at least 100 million or more, not billion yet, but close. We know Ben Graham investment record was around 20% per year annual return.

Where is wealth of Technical Analysis traders? Where is long term performance record of legendary technical analysis trader/investor? How did they make money? from selling books or mainly from investing?

This question has to be addressed. With 20% to 40% annual average return and with just $100k capital, it is pretty easy to get into millionaire. I would expect lot more TA investors in billionaire level if it truly works as good as value investing.

Why aren't more technical analysis billionaires or at least $100 million level investors there in USA? .

Many years ago when I was converted from TA trader to value investor, I could only conclude that lots of TA pros made money from selling books or charts rather than from investing.

With 20% to 40% return, sooner or later, lots of investors are going to enter millionaire or even billionaire level in USA. But to make money with selling books or charts only, it is very hard to make that level.

**nodoodahs** Sat Feb 11, 2006 8:08 pm

It's not about TA vs VI. It's about integrating them into a cohesive investment strategy that is founded on behavioral finance. Arguing about which is "better" is like saying tang soo do is "better" than akido. Both have the same basic purpose, and both use related but somewhat different techniques. IMO no matter how accomplished someone is in one field, learning and growing in the other can only make them better, and in the same way that learning some basic Japanese grappling and joint lock techniques might save the Korean fighter's life someday, using TA to enhance the VI's timing of entry might save them some capital someday.

Geoff of Gannononinvesting.com has started a couple of clubs on Marketocracy. My entry in the 20 ideas club will be entirely based on TA. My entry in the blogsphere club will be based on my current investment philosophy, which is (1) screen based on PE, FPE, PB, 52WKTOTRET, DE, and ROA for value stocks, (2) screen based on PB, DE, EPS, and SHORTRATIO for anti-value stocks, and (3) assess the technicals for entry points and assign each to either short or long categories. I can easily see myself shorting a stock and then turning around and going long several months later, and vice versa. Short positions are about 1/10 of my total positions and I collateralize them with my longs. Since Marketocracy doesn't allow for long/short portfolios, my entry in that club is long and I run a couple of separate short portfolios there to work on my skills.

I think one reason why there aren't long discussions on this forum may be your desire to "rule the roost." It seems most every post, the last poster is "blast." This doesn't encourage discussion. Just my two cents.

**blast_investor** Sat Feb 11, 2006 8:14 pm

Here is part that I want to be open with from your article:

"I will concentrate on making a case for technical analysis as a way to improve upon one’s implementation of value investing."

I understand that you want to improve value investing with technical analysis.

You may be able to do that. But it is not proven until you can prove it. I am not very optimistic on the prospect of your effort. My reasoning is this:

Yes, you may be able to do it. However, consider this: value investing is superior and proven method that made lots of investors rich. Technical analysis is unproven and I know no billionaire or $100 million worth investors in USA that made it with TA.

You want to use a method that nobody made it to improve a method that made lots of investors billionaires and millionaires. It is possible, but I am not very optimistic on this.

**nodoodahs** Sat Feb 11, 2006 8:18 pm

nodoodahs wrote: I think one reason why there aren't long discussions on this forum may be your desire to "rule the roost." It seems most every post, the last poster is "blast." This doesn't encourage discussion. Just my two cents.

**blast_investor** Sat Feb 11, 2006 8:20 pm

Another real life case to consider:

More than a decade ago when I was into Technical Analysis, I invested my money into a mutual fund call "Bonnel" something (Art Bonnet?). Forgot the name, but that fund performance was very good.

The strategy of that fund used both technical analysis and fundamental method. I bought into that idea.

But you know the result, that fund went no where after the bubble burst.

The concept of combining technical analysis and fundamental analysis is not new thing. But it never worked.

**blast_investor** Sat Feb 11, 2006 8:22 pm

:D

I am active poster here. The forum never deleted other members' post. I would hope more posts from other members.

But you have a good point here.

nodoodahs wrote: nodoodahs wrote: I think one reason why there aren't long discussions on this forum may be your desire to "rule the roost." It seems most every post, the last poster is "blast." This doesn't encourage discussion. Just my two cents.

**blast_investor** Sat Feb 11, 2006 8:45 pm

But the problem with "integrating" approach is the possibility of making VI worse.

VI method is well published, well known. It can make money.

If you integrate VI+TA, then essentially it is new thing. It could be costly. VI TA are in conflict many times. TA is short term oriented, VI is mostly long term oriented.

If you do not care about return part in experimenting, of course it is not issue. But again, you are re-inventing the wheel, whether it will work or not in the long run, it is unknown.

nodoodahs wrote: It's not about TA vs VI. It's about integrating them into a cohesive investment strategy that is founded on behavioral finance. Arguing about which is "better" is like saying tang soo do is "better" than akido. Both have the same basic my two cents.

**grapes** Mon Feb 13, 2006 5:20 pm

I guess there are more than one roads to be rich. Value investing is definitely a proven way as Blast pointed out and proved in the recently 4-5 years -- the time horizon I witnessed. I firmly believe Blast made money much longer than it using value approach.

If I already have the first bucket of gold, I will definitely be fully convinced to follow the value approach. However, accumulating the first bucket is really painfully slow in my personally opinion using value approach Blast, since you used TA, momentum approaches in your early years and got you first bucket of gold there, can you share some of your experience there? Nodoodahs, any insight are also welcome.

Basically, I think the gist of TA, momentum approach is the following:

Let winner run and cut loss at 8%. If it is in a booming market like 2003, 2004 or 1999, 2000. It only take 4-5 good bets among 10 bets to achieve good return, (>50% at least). If you use options to amplify the return, also the risk of course, maybe even 2-3 good bets in 10 can give you very good return. Basically it looks like that the small investors has negligible impact of most stocks (except micro micro ones), so cut loss is the advantage to play this game.

Obviously this is a lot risky than value approach. I think there is no point to argue about it. No one can tell realibly when the market is going to be in such favorable condition, namely having a good chance to have 4-5 good bets in 10.

Also, once you are really rich, namely net worth greater than 100 million, this approach is less likely to work for the reason it is not so easy to cut loss of so huge amount as now you are part of the market. I think this explains why there is rarely TA expert having net worth greater than 100 million. However, in order to obtain the first million or half million, do you guys think it worth to have a try using momentum/TA approaches? Or is there still some significant risk that I did not see?

blast_investor wrote: But the problem with "integrating" approach is the possibility of making VI worse.

VI method is well published, well known. It can make money.

If you integrate VI+TA, then essentially it is new thing. It could be costly. VI TA are in conflict many times. TA is short term oriented, VI is mostly long term oriented.

If you do not care about return part in experimenting, of course it is not issue. But again, you are re-inventing the wheel, whether it will work or not in the long run, it is unknown.

nodoodahs wrote: It's not about TA vs VI. It's about integrating them into a cohesive investment strategy that is founded on behavioral finance. Arguing about which is "better" is like saying tang soo do is "better" than akido. Both have the same basic my two cents.

**grapes** Mon Feb 13, 2006 5:29 pm

By the way, I would very much like to discuss with Blast and other gurus else here. However my skill is not sorphisticated enough yet, but not for the reason that blast is trying to "rule the roost". So most of the time, I just seek answers and insights from Blast. I guess a lot of people here is in the same shoe of me. In fact, what really distinguished Blast from other real gurus is his willingness to share his reasoning and insights. Of course, his track record is also impecable.

blast_investor wrote: :D

I am active poster here. The forum never deleted other members' post. I would hope more posts from other members.

But you have a good point here.

nodoodahs wrote: nodoodahs wrote: I think one reason why there aren't long discussions on this forum may be your desire to "rule the roost." It seems most every post, the last poster is "blast." This doesn't encourage discussion. Just my two cents.

**blast_investor** Mon Feb 13, 2006 8:39 pm

The red statement is fair statement. Many people got rich because they are good at what they are doing: running own business, CEO of some public company, high paid job in Wall Street, large option award and good timing in the haydays of internet bubbles, real estate investing etc.. There are definately more ways to get rich than just value investing.

However, in my opinion, in the stock market, excluding those business etc non-stock efforts, value investing is the best method to get rich quickly, as quick as 20% to 40% per year. That is quicker than most of other methods I know of.

I made money with momentum and TA before value investing many years ago. But the return was not that great in after-tax basis. I was lucky because I invested into a momentum stock called Yahoo and held for 1 year and made 10 times. I became famous in Chinese BBS MITBBS. But that was lucky, I could not repeat that afterwards. I also incurred huge loss as well in early 1999. In after tax basis, the pre-value investing period was not a satisfied experience. That was all my hands-on real life experience with my own money behind it.

I was better than most of other momentum traders then and I was lucky to quit and preserved most of my capital with above index return during crash. I highly doubt other momentum investors would have been that lucky as I was.

The real money came to me was from value investing. I made my first million mainly from value investing. I believe anyone sticking with value investing will make it into millionaires quickly with value investing.

This is so obvious. Most of salary level in USA is below $100,000 a year. The salary grows at 2 - 3% a year. 1 $million capital plus 20% annual performance is $200K per year, and it is growing.

I believed in Ben Graham, I bet all my saving on his method. The return was well north of 20%. In recent 2 years return was 44% a year. Anyone with that performance can easily see the future there even if the starting capital was $40,000 from savings account from job.

Most short term traders have short sighted vision. They like quick money but they do not know Ben Graham and Warren Buffet way is the quickest way to be rich in stock market if one knows to get that 20% plus absolute returns, either from themselves or from a famous hedge fund or from a hedge fund-like service like BIRTP in the past.

The real trick is: absolute return in 20% or above consistantly in the long run. The only way to get that from stock market is from value investing method. That is my opinion.

grapes wrote: I guess there are more than one roads to be rich.

Blast, since you used TA, momentum approaches in your early years and got you first bucket of gold there, can you share some of your experience there? Nodoodahs, any insight are also welcome.

Also, once you are really rich, namely net worth greater than 100 million, this approach is less likely to work for the reason it is not so easy to cut loss of so huge amount as now you are part of the market. I think this explains why there is rarely TA expert having net worth greater than 100 million. However, in order to obtain the first million or half million, do you guys think it worth to have a try using momentum/TA approaches? Or is there still some significant risk that I did not see?

**grapes** Mon Feb 13, 2006 9:12 pm

Thanks Blast for sharing your personal experience. I totally agree people get rich by doing what they are good at. (Put another way, your competence circle). WB also said similar thing in investing. The problem for me is that I don't have a competence circle at all. So I am very glad to read your posts. In fact, I quick reading MITBBS's stock board long ago.

Since you have personal experience about momentum trading, where is the risk of stopping loss with winners riding strategy lies assuming bull market aside from taxing? For tax issues, I guess one can trade his IRA account or form some kind business etc to avoid it. At least in the starting up phase, it is not that bad I guess.

blast_investor wrote: The red statement is fair statement. Many people got rich because they are good at what they are doing: running own business, CEO of some public company, high paid job in Wall Street, large option award and good timing in the haydays of internet bubbles, real estate investing etc.. There are definately more ways to get rich than just value investing.

However, in my opinion, in the stock market, excluding those business etc non-stock efforts, value investing is the best method to get rich quickly, as quick as 20% to 40% per year. That is quicker than most of other methods I know of.

I made money with momentum and TA before value investing many years ago. But the return was not that great in after-tax basis. I was lucky because I invested into a momentum stock called Yahoo and held for 1 year and made 10 times. I became famous in Chinese BBS MITBBS. But that was lucky, I could not repeat that afterwards. I also incurred huge loss as well in early 1999. In after tax basis, the pre-value investing period was not a satisfied experience. That was all my hands-on real life experience with my own money behind it.

I was better than most of other momentum traders then and I was lucky to quit and preserved most of my capital with above index return during crash. I highly doubt other momentum investors would have been that lucky as I was.

The real money came to me was from value investing. I made my first million mainly from value investing. I believe anyone sticking with value investing will make it into millionaires quickly with value investing.

This is so obvious. Most of salary level in USA is below $100,000 a year. The salary grows at 2 - 3% a year. 1 $million capital plus 20% annual performance is $200K per year, and it is growing.

I believed in Ben Graham, I bet all my saving on his method. The return was well north of 20%. In recent 2 years return was 44% a year. Anyone with that performance can easily see the future there even if the starting capital was $40,000 from savings account from job.

Most short term traders have short sighted vision. They like quick money but they do not know Ben Graham and Warren Buffet way is the quickest way to be rich in stock market if one knows to get that 20% plus absolute returns, either from themselves or from a hedge fund or from a service like BIRTP in the past.

grapes wrote: I guess there are more than one roads to be rich.

Blast, since you used TA, momentum approaches in your early years and got you first bucket of gold there, can you share some of your experience there? Nodoodahs, any insight are also welcome.

Also, once you are really rich, namely net worth greater than 100 million, this approach is less likely to work for the reason it is not so easy to cut loss of so huge amount as now you are part of the market. I think this explains why there is rarely TA expert having net worth greater than 100 million. However, in order to obtain the first million or half million, do you guys think it worth to have a try using momentum/TA approaches? Or is there still some significant risk that I did not see?