Forum Archive Index - July 2001

[Lyall Taylor <lyall.taylor@xtra.co.nz>]

To all the devout fundamentalists out there, I would like to say this to
you.  

As a once devout fundamentalist myself, I can understand and empathise
with where you are coming from.  I once too believed that charting was a
load of rubbish, and that any assertation that future prices can be
predicted based on past price movements was rediculous.  Future
movements will be based on future events yet to be realised, right?

Well, yes and no.

While using charts alone is not my business, as a fundamentalist, I
still find it useful to consider the chart in conjunction to my
analysis.  As Phaedrus correctly stated, charts show what IS happening,
not what SHOULD be happening.  Knowledge of this is useful.

Consider this:

Every fundamentalist has done it.  They have bought a stock with
excellent fundamentals, only to find it float aimlessly around, or even
down, for often extended periods of time before an anouncement finally
sparks a rerating.  Isn't it frustrating to identify a good company
first, only to have to wait longer than others who can buy, often at a
lower price, months, or even years later and also take part in the
action?  If you had known it was going to go nowhere you would have
delayed buying.  But knowledge of this was impossible right?  Wrong.

While holding long term, a strategy of identifying good quality
companies, and buying (irrespecitive of trends) and holding will produce
satisfactory results, but this return can be improved by considering
what IS happening to the stock before buying/selling.

Take for example FRU at the moment.  While I, and many others believe
this stock is worth much more than its current price, buying now is
pointless.  The market has digested the recent news, and priced the
stock accordingly.  The closest that a rerating can be expected to occur
will be the full year announcement some months off yet, and it could
well be months after that.  Until an uptrend becomes evident, buying now
will yield very substandard results in the near future.

Now one must appreciate the power & reasons behind uptrends.  Uptrends
are not just random market movements.  They show that demand exceeds
supply, and hence the price rise.  Buying stocks that are in uptrends
(with good fundamentals) is often much more rewarding than buying stocks
with good fundamentals that are in downtrends.   

Several of the devices chartest use are quite logical.  When a stock
price breaks a resistence level, it shows that demand for the stock has
increased.  Investors are now prepared to pay a level above what they
have been for some time.  This shows that demand has increased, and
hence more upward movement can be expected.  The same is true in reverse
with support levels.

Stock prices are exclusively driven by what investors are prepared to
pay.  A stock which may have the best fundamentals ever will go no where
if nobody else is interested.  Increased demand is required to drive the
price up, and charting shows when such demand is moving in.

A fundamentalist need not only consider charts, but a hybrid system is
very rewarding. It avoids holding stocks that are going nowhere for
excessive amounts of time.  One of the best systems I believe is buying
stocks with good fundamentals that are moving upwards.  Others are also
interested & the price is being driven up.  When a stock is good value,
and the price is in an upward trend, there is nothing to stop it going
up.

Furthermore, the object of investing in the stock market is too sell at
a price higher than one payed.  Any system that allows this to be done
at an acceptable win/loss ratio is a system that should be respected.

Buying into stocks that ARE in the process of being continually rerated
higher, or stocks with excessive demand, can be very rewarding.  You go
along for the ride as the stock continues to be bid higher.

A couple of my current holding are WRI and CED.  These both have a great
combination of good fundamentals, and an upward trend.  Investors ARE
recognising the value, and pushing them higher.  I have made good
returns very quickly with these.  I recommend them as case studyies, and
I encourage you to observe there performance.

The key point is really this:  Charting does not attempt to predict
future prices, only to identify trends.  Participating in upward trends
can yield very good returns.  Phaedrus attempted to make this point on
several occasions but it hasn't seemed to have caught on.

I would like to thank Phaedrus for his comments.  They are top quality
and I believe any fundamentalists should go back, read them again, and
consider the logic carfully.  This could add enormously to your returns
- don't let pride and arrogance stand in the way.


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