Everyone has heard the definitions of technical and fundamental investors. With fundamental analysis, investors study the economic factors and indicators that might affect the value of an investment (the economy, the respective industry, the company), while with technical analysis, investors simply consider a specific investment’s historical price and other variables. Many associate technical analysis with market timing.
However, some people define themselves as fundamentally-based investors, but in practice they are technically-based traders. If you intend to be a fundamental investor, you need to be aware of four practices or habits worth avoiding.
1. Picking stocks without researching first
Do you trade on rumor? Many investors, including those devoted to the fundamentals, may study the financial reports, but end up buying shares of companies based on information heard on chat rooms, or seen in the financial news. If you buy shares because a company might be a takeover candidate, or is about to announce a new product, or is rumored to be moving up among competitors, then you are a technical trader.
A fundamental investor will hear the same things, but before acting, also checks to see if there is any change in the present or expected financial strength of the company.
2. Trading stocks on high volume
Do you buy shares and then wait to see how things develop over many months? Or do you tend to trade often?
If you take small profits as soon as they materialize or dump shares to cut small losses, then you are behaving as a technical trader rather than a fundamental investor. Remember, you have to expect short-term price variation. But if you have selected a company’s shares based on solid fundamental strength, avoid trading too often.
3. Paying more attention to price than to the fundamentals
A technician is almost exclusively focused on price movement, and nothing else. A fundamental investor recognizes value in price changes but picks companies based on fundamental quality. So you might time purchases when price falls to bargain levels. However, if price becomes your sole criterion for buying or selling shares, then you have slipped out of the fundamental camp and into the technical.
4. Checking price every day
Technicians enjoy the action of checking price often — some look several times during a trading day — and live for the excitement and satisfaction of high levels of trading. A true fundamental investor gains nothing by looking at prices too often; remember the adage that “the stock market climbs a wall of worry.”
Of course you should keep an eye on prices, but remember that as a fundamental investor, your focus should be on monitoring the company’s financial strength and profitability. As long as your original assumptions still apply, don’t sell shares to take profits or cut losses.
Technical trading is appropriate for many market players and even the most conservative fundamental investor may want to use a limited portion of capital to trade; but if your primary focus is more conservative and you define yourself as a buy-and-hold investor, avoid checking your holdings so often that you fall into the enthusiastic but at times ill-advised hamster wheel of high-level trading. If you have faith in the fundamentals, you will enjoy more profits by staying away from the speculative side of things.
Michael C. Thomsett is author of over 60 books, including Winning with Stocks and Annual Reports 101 (both published by Amacom Books), and Getting Started in Stock Investing and Trading (John Wiley and Sons, scheduled for release in Fall, 2010). He lives in Nashville, Tennessee and writes full time.
Are You Really a Fundamental Investor — or a Day Trader? provided by Minyanville.com.