“If we avoid the losers, the winners will take care of themselves” Howard Marks
I just read an article “Combining FA and TA” from an investment blog from Singapore here:
http://sgmusicwhiz.blogspot.co.nz/2010/08/combining-fa-and-ta.html
It is an interesting article which gives us some food for thought. The author concluded that:
“I am an advocate on concentrating on either FA or TA in order to excel in either; rather than try to “marry” the two methods together to produce a hybrid. Perhaps one can really come up with such a successful union, but even then it has to be rigorous, consistently applied as well as time-tested. These conditions may sound harsh, but are necessary to prove that a type of method is due to skill and not just luck. “
Let us use V.S Industries as an example. Let’s say the share price is very bullish in term of TA now, but fundamentally you think its intrinsic value from some kind of valuations has been exceeded, would you buy some more based on TA, or would you sell basing on your FA?
Or let’s say, the chart shows it is bearish now, and even if you have bought it higher than its price now earlier based on the good fundamental value versus it price then, would you sell and cut-loss, even though fundamentally, its value is still way ahead of its share price?
So the question is how are you combing FA, which is used by investors, and TA, the province of traders?
Buying undervalue shares with momentum: Evidence from US
A well-known US-based finance professor Josef Lakonishok tried to find under-valued, out-of-favour companies at the point when the market is starting to recognize them – a combination of value and momentum. From a fundamentals perspective, he begins by looking at price-to-book, price to-cash flow, price-earnings and price-to-sales ratios in order to identify unloved stocks. However, identifying a group of out-of-favour stocks is just the beginning. The trick is to ascertain which of them are likely to rebound versus being cheap for a reason, such as being near bankruptcy. So, he then looks for those shares that are showing sign of momentum, either in terms of price momentum (relative strength) or in terms of improving analyst sentiment and earnings surprises.
It turns out that the approach has been a barn- stormer. According to the American Association of Individual Investors, the Lakonishok screen has made a 15.7% CAGR for a number of years since inception, compared with 2.3% for the S&P 500, although its more recent performance has been less impressive – much like most momentum strategies in the face of market volatility!
Lakonishok started with FA first as the core investment strategy, and then add a little TA, and not the other way round. This is also generally true for most other investors using a combination of FA+TA.
The return of pure FA and TA+FA investing strategies in Bursa
Here I base on my little experience on the two sets of comparative results which have a longer record of 2 to 3 years on the two different investing strategies which were posted in i3investor. I compare the return of the portfolios as if they are held for the whole duration. This obviously may not be true for the performance of the portfolios, especially the one which is based on TA+FA, as the player may have entered and exited multiple times on the stocks in the portfolio basing on his charts, or may have taken profit or cut loss and have abandoned the stocks concerned. However, this is the only way I can compare as I do not have his trading records.
The first set was posted in 20th January which I have discussed briefly in my last article below.
http://klse.i3investor.com/blogs/kcchongnz/78074.jsp
My portfolio, basing on pure FA is shown in the link below.
http://klse.i3investor.com/servlets/pfs/13147.jsp
The TA+FA portfolio belongs to Ooi Teik Bee as shown here.
http://klse.i3investor.com/servlets/pfs/12952.jsp
Table 1 and Table 2 in the Appendix shows the return of the two portfolios, both with 10 stocks each, as at 5th June 2015, after two and a half years of holding period.
Risks and Returns of portfolios set up on 21st January 2013
The portfolio of 10 stocks using TA+FA as shown in Table 1 returned an average of 68.2% with a median return of 27.3%, very good for a period of two and a half years, at least according to my standard. There were two losers; Benalec at -50.4%, and Alam at -25.3%. 4 out of 10 stocks under-performed the broad market return of 12% during the same period. Still not bad at all.
Table 2 is the result of the portfolio of 10 stocks using pure FA. It happened to do better with an average return of 120.2% and median return of 74.5%. All stocks made positive returns and there were no loser. Only 2 out of 10 stocks under-performed the broad market, marginally. This may imply the pure FA strategy incurred less risk than that of the TA+FA strategy.
Although the pure FA portfolio out-performed the TA+FA portfolio in the longer term of two and a half years, the TA+FA portfolio did out-performed the FA portfolio in the shorter term of 7 months when an analysis of their returns were made. I have actually made a comparison of the return seven months after the above portfolios were put up.
http://klse.i3investor.com/blogs/kianweiaritcles/33790.jsp
During the seven months period, the TA+FA portfolio returned 55%, out-performed the pure FA portfolio of 38%.
Hence we may conclude that trading stocks basing on TA (plus a little FA) could yield better return in a bull market in the short-term, provided you are really a good technician, but not necessary in the long-term basing on the above comparisons. But how many retail investors are really that good to beat the syndicates, insiders, institutional investors who have all the computer and financial powers?
Risk and return FA Vs TA+FA portfolios set up on 1st August 2013
One thing we should bear in mind that in investing, it is not just the return we are looking at. We should also concern about the other part of the investment equation, the risk. Let us refer to the other set of portfolios put up in i3investor on 1st August 2013, again one basing purely on FA , and the other using TA+FA as illustrations as shown in the links below.
http://klse.i3investor.com/servlets/pfs/19386.jsp
http://klse.i3investor.com/servlets/pfs/19385.jsp
The stocks selection processes were properly and fully articulated as shown in the link below:
http://klse.i3investor.com/blogs/stock_pick_challenge_2013_2h/blidx.jsp
My pure FA portfolio of stocks were mostly selected based on Joel Greenblatt’s Magic Formula investing; i.e. buying good companies at cheap price, augmented by healthy balance sheets and cash flow statements. Only one stock, Plenitude was based more on Graham net current asset valuation.
Table 3 and Table 4 tabulated the return of our portfolios of 10 stocks as on 5th June 2015 after about two years now using the adjusted prices in Yahoo Finance.
Risk and Return of TA+FA portfolio
Table 3 shows the average return of TA+FA portfolio of 68.9% in the 2-year period, as compared to the return of the broad market of just 3%. Not bad at all. However, the Median return is a negative number of minus 9.1%. The standard deviation of the average return is very high at 191%. There were 6 losers out of 10, with quite substantial loss for Pantech warrant (-43.5%), and GOB (-33.6%). There were two multi-baggers in Hapseng warrant at +571% and Lii Hen at 214%. These two outliers made up almost all the returns of the portfolio.
Risk and Return of pure FA portfolio
Table 4 shows the average return of pure FA portfolio of 11 stocks at 85.9% in the 2-year period, as compared to the return of the broad market of just 3%. It is 17% above the return of the above TA+FA portfolio. The standard deviation of average return is 125%. The Median return is also great at 45.2%. The portfolio is clearly to have lower risk with only two losers out of eleven stocks. Moreover, the losses were small with Tien Wah at -14%, and Haio at -6.1%. There were also two multi-baggers outliers in Datasonic at +333% and Homeritz at +327%.
In a small sample size with outliers, the median provides a measure that is more robust than the average because it is not at the mercy of outliers.
Conclusions
The use of either FA or TA, or TA+FA seem to work well in Bursa from the above analysis. However, bear in mind that the success of each method very much depends on the skill and experience of the individual users. I am not sure if one can successfully combine TA with FA to create a successful hybrid. It may be better to focus on being good at either FA or TA, as it may simply dilute any advantages which each style purports to convey on the practitioner, resulting in sub-par performance over the long-term as opposed to a more “purist” approach.
My experience on the use of pure FA has worked very well for me as shown in the analysis above; not only it provided great returns so far, the risk is also very low. I kind of find it intuitive; buying good companies with high return on capitals when they are cheap, coupled with healthy balance sheets and good cash flows should logically works well. It may not work well for one or two companies in the short term, but surely it should work for a diversified portfolio of stocks in the long term. However, the time frame of the experience of just 2 to 3 years is still short for fundamental value investors, and it may be partly due to the good market conditions thus far, or may be some real skill? It may be still early to tell.
I know this may open up for some fierce argument about the use of FA and TA. But isn’t sharing opposite views useful in our learning? You are hence welcomed to present your arguments, better if they come with facts and records.
For those who are interested to learn pure fundamental analysis in stock investing, please contact me
K C Chong (14th June 2015)
Appendix
Table 1: OTB portfolio on 21st January 2013
Table 2: My portfolio set up on 21st January 2013
Table 3: Return TA+FA portfolio set up on 1st August 2013
Table 4: Return FA portfolio set up on 1st August 2013
Created by kcchongnz | Jan 22, 2024
Which to buy, Insas or Insas WC?
Created by kcchongnz | Jan 15, 2024
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Created by kcchongnz | Oct 02, 2022
Not totally true ! Those TA traders knows where to cutloss /sell when trend changes. For example, Sell HAIO@$2.55, Alam@$1.40, Benelec@$1.20 etc.that's the beauty of using TA !
2015-06-14 16:21
- 冷眼 -
股票市场其实是一个江湖,江湖中的好汉,各显神通,在这湖里争金夺银,他们用来克敌致胜的方法,其实就是一种武器,在江湖的打斗中,难免腥风血雨,在股市这个江湖中,却是夺人财富,但兵不血刃,杀伤力之大,不在真刀真枪的江湖之下。
武林中所用的是十八般武器,股市江湖中所用的价值投资法、基本面法、图表、动力趋势法(Momentum)、投机、取巧、对敲、谣言诱敌、放假消息、求签、拜神、风水,甚至有人以太空梭的发射原理来预测股市趋势,所有这些方法归纳起来,只不过是藉以达到赚钱目标的武器。
方法(武器)花样这么多,究竟那一种方法最有把握?那一种最管用?
十八般武器,每一种都有其长处与短处。世上根本没有十全十美的武器,否则的话,所有的人都会采用该种武器,其他武器就自然而然的被淘汰了。至今十八般武器都仍存在,这一事实就说明了每一种武器都有可取之处。
但在股市这个江湖中,情况就不一样,尽管方法百出,而且不断的推陈出新,但能够经得起时间的考验、历百年而不衰的方法却不多。许多新的方法在开始阶级,都有特出的表现,但都如昙花一现,经过一段时间,就消声匿迹,再也没有人提起,至今硕果仅存,历久弥新的,也不过寥寥数种,而其中荦荦大端者,不外是基本面派和图表派。
究竟那一种方法最管用?其实视个人而定。就好像那一种武器最犀利,在很大的程度上取决於应用武器的人,以及他的功力的深浅。
在股市中人,每个的背景、所处的环境、教育程度、财力状况、个性、人性观、性格倾向、理财理念、风险承受程度、各各不同,投资方式,也就因人而异。适用于甲的,未必适用於乙,适用於中年人的,未必适用於青年人,所以,股票必须由自己去选,别人不能代你选,因为只有你自己才知道你所要的是怎么样的股票,别人越俎代庖,多数帮不上忙。
在三国演义中,即使是刘备、关羽、张飞这三个结义兄弟,所用武器亦各异。刘备用的是双股剑,关羽用的是八十二斤重的青龙偃月刀,而张飞用的是丈八点钢矛。很明显的,都是配合他们的体力而打造的,这样才能在“三英战吕布”的这场惊天动地的厮杀中,配合得天衣无缝。
同样的,在股市中,你必须检讨你自己,了解你自己的个性、财力状况、处事作风、风险承担程度等等,然后据此制订最适合你采用的投资方法。如果你的方法,长期为你创造财富,就证明你已选对方法,走对了路,就应该择善而固执,坚持下去,不可见此山望那山,中途改弦易辙。
http://klse.i3investor.com/blogs/newcoldeye/17350.jsp
2015-06-14 17:33
Suffice to say, buy stocks based on FA will be a good defense at the current investing environment, taking into consideration:-
1. Local political instability, 1MDB and PFI issues, depreciating ringgit, low oil price, inflation, impending toll hike, housing glut, potential interest rate hike....
2. Greece financial crisis, Greek default, Grexit, ramification on Grexit...
3. Effect of FED rate hike on Malaysia (may be Jun, Sept or later, but is definite).
4. Market prophecies:
4.1 World market crash 2015 - Jim Rickards https://www.youtube.com/watch?v=Le73sWDlhz4
4.2 Warning: Stocks Will Collapse by 50% http://www.moneynews.com/MKTNewsIntl/stock-market-crash-warren-buffett-indicator/2014/10/03/id/598461/?dkt_nbr=ufos34vz&utm_source=taboola&utm_medium=referral
I opine FA give you line of defense, so you know at what price constitute good buy.
TA provide you action plan, when to become 'offensive', or take necessary action.
勇者 创造机会
智者 把握机会
愚者 找不到机会 喪失机会
絕望者 永遠沒有机会
2015-06-14 17:40
Mr. Chong, TA is an extension of FA. FA + human behavior = TA.
TA works as FA has been taken into account without you realizing it.
You chase after a stock in the short term because the fundamentals of this stock have been considered good, but as the price of the stock appreciate the risks increase too. Human behavior is open to manipulation that is why it is far more difficult to predict in the short term. ( not to mention the limitations of both FA and TA and all the others external factors high lighted by ks55) Some investors will use their business experience to do some forward thinking to decide where a company is heading before they invest in the company. There are no hard and fast rules but it is best if you have taken everything into consideration before you invest. We use all available tools to reduce our risks in order to have an educated guess. It is not an easy thing to do that is why most of us have a normal job.
I enjoy reading your write up. Thank you for taking the time to educate the public. Very decent of you to do so.
2015-06-15 02:29
Europe's main stock markets sank at the start of trading on Monday as fears of a Greek euro exit intensified after talks with creditors collapsed.
Negotiations between Greece and its creditors broke down in less than an hour on Sunday, with each side blaming the other's refusal to back down on certain issues.
"They came with their hands in their pockets," a furious EU source close to the negotiations told AFP, while one Greek official described the creditors' demands as "irrational".
So which Greece confirmed dead now, what else can you expect from Bursa Malaysia??
2015-06-15 15:59
Greek jitters upset US, European stock markets. Now with Greece confirmed dead, tonight Down Jones will crash.
Market prophecies:
1 World market crash 2015 - Jim Rickards https://www.youtube.com/watch?v=Le73sWDlhz4
2 Warning: Stocks Will Collapse by 50% http://www.moneynews.com/MKTNewsIntl/stock-market-crash-warren-buffett-indicator/2014/10/03/id/598461/?dkt_nbr=ufos34vz&utm_source=taboola&utm_medium=referral
Will it materialize this time ??
Are you prepared ??
Are you having spare cash ??
Are you having guts to take this opportunity to make money ??
But whether make or break depends on your buying strategy........
Good luck........
2015-06-15 16:10
In my opinion, both tools are contradictory. You buy using FA because stock is cheap, you buy using TA because stock has gone up, making it expensive. It's fine in a bull market when after stock has gone up, it is still likely to go up some more, thereby validating claims that TA+FA works. How about in a bear market, where stocks drop over an extended period of time where false breakouts are aplenty? Would anyone dare to claim TA+FA works in a bear market? Both methods are inherently contradictory, let's see if those who sing praises of FA+TA dare to fish at the bottom.
2015-06-15 16:18
What is FA? Fundamental Analysis. What constitute FA? Is it just study how good the company is? Is it just study whether it is going to make more money? Is it merely talk about FCF?
What is TA? Technical Analysis. Is it just buying when sufficient volume has build up? Is it just based on price changes? Is it just trading vide volume alert/ How about exit?
I am no sifu, but most of the time (in fact, all the time) make money over time frame of one year.........
Now is the time to check you are sifu or otherwise.
No hard feeling to all FA and TA sifu, please.........
2015-06-15 16:48
ks55,
FA and TA are the two major investment techniques, or may be the only two in investing. Strange that you asked. No, FA is much more than what you have mentioned. Although I don't know much about TA, but I think it is also much more than what you have mentioned.
Is making money every year such a great feat? In the long term, the total return of mature markets has been about 10%, maybe a little less in recent years. So just making money in the stock market doesn't seem to be that great to me.
The article here did show you some good returns as compared to the broad market in the last few years, didn't it? At least here is not pure talk, but with published records.
Posted by ks55 > Jun 15, 2015 04:48 PM | Report Abuse
What is FA? Fundamental Analysis. What constitute FA? Is it just study how good the company is? Is it just study whether it is going to make more money? Is it merely talk about FCF?
What is TA? Technical Analysis. Is it just buying when sufficient volume has build up? Is it just based on price changes? Is it just trading vide volume alert/ How about exit?
I am no sifu, but most of the time (in fact, all the time) make money over time frame of one year.........
Now is the time to check you are sifu or otherwise.
No hard feeling to all FA and TA sifu, please.........
2015-06-15 17:03
Sorry lah kcchongnz. Not my intention to hurt anybody's feeling, just want to make everybody aware the risk and opportunity in stock market.
I am already retired. I play safe. Mostly in REITs.
生平無大志 只求八巴仙
不求有大功 只求無大過
2015-06-15 17:34
生平無大志 只求八巴仙
不求有大功 只求無大過
ks55,
I always like your above statement. That is my main philosophy too.
2015-06-15 17:35
> From: "Phillip Capital Management Sdn Bhd" <pcm_investment@poems.com.my>
> Date: 25 June 2015 06:17:51 pm GMT+8
> Subject: To Pick or To Time - Which is More Profitable?
> Reply-To: "Phillip Capital Management Sdn Bhd" <pcm@poems.com.my>
>
> Dear Investor
>
> Timing is important but it is very difficult to master. Trading based on timing is more suitable for those who are disciplined, can take occasional losses and no regret if they are wrong. Unfortunately, most people cannot overcome these behavioral shortcomings. If you cannot control these emotions, timing the market could end up being a worse strategy.
>
> Thank you.
>
> Phillip Capital Management Sdn Bhd
> 25 June 2015
2015-06-26 14:13
RonnieKimLondon
Mr Chong. You are not only a great investor but one of the most honest people around.
Thank you for sharing. God bless you and your family.
2015-06-14 16:05