The problem with fundamental analysis

[Packersoldkidney]

Try CLF and GGB on the Nasdaq. Both have run, but got plenty more in them. Both with amazing PE's, earnings etc etc. Both cyclical.

[Snoopy]

quote:Originally posted by Packersoldkidney

I'd agree with Cooper when he stated that PE's can give you a false picture of a situation.

The problem with P/E ratios is that the 'P' is known (just look at the market price) but the 'E' is not certain. Just because you can go to the newspaper and blindly read off 'P', that doesn't mean you can blindly assume 'E' to be correct.

quote:
Obviously I have a bit of a problem with 'forward earnings estimates' etc etc - because that is real fortune telling stuff. There actually is a website that rates fundamental 'estimates' called starmine.com - worth a look if you have the time - they basically rate different analysts ability to fundamentally 'predict' the future.

I totally agree with taking a sceptical stance on brokers estimates of 'E'. You have to consider what happens if the brokers are wrong. If the P/E is already high and the brokers estimate next years 'E' to be even higher you can very easilly set youself up for a big fall. You get a double whammy effect if earnings are not up to expectations.

The share price will fall both because expectations of earnings have fallen short and the premium effect of a high PE is downrated at the same time. These falls are usually sudden and brutal, so you will not be able to use a' stop loss' to get you out at a good price. That in a nutshell is why 'growth investors' tend to be below average performers over the longer term.

However, if you are a 'value investor' and only buy shares that are cheap, then this double whammy effect works in your favour. Not only will the share price be rerated when earnings rise but the PE ratio is likely to be rerated as well because future growth prospects look so much better.

quote:
Use fundamental analysis as an individual stock selector. Effectively the stocks with the best ratios you buy - but that still doesn't solve the problem of when to buy and when to sell. Entry and exit points really are a technical art - and I know that I'll have an argument from Snoopy in writing that - but fundamental indicators are frankly no chop at telling me to buy this and this company at this point.

That really depends on how you look at it. Sure fundamental analysis will not tell you when a share has hit 'rock bottom'. But you can use a Buffett style analysis to determine an 'expected return' if you buy in today. If that expected return is to your satisfation and you buy today, then what happens if the share price goes down the next day? Nothing. you are still on track for your expected return. It is just that the person buying in the next day will get an even better expected return. Great for them, but I don't see that as a problem for 'you'.

Of course technical analysis will absolutely ensure that you don't buy at the bottom either. So if a share hits your 'cheap' spot price but you have to wait for the trend to be confirmed before you buy in you will always do worse than the pure fundamentalist buying the same share on a 'value' 'basis.

quote:
I guess what I'm saying is pick the best stock at the right time, buy it, and then turf it when its the right time. Selecting the best stock is a fundamental art: entry and exit is technical.

Unfortunately trying to 'time' t

[Phaedrus]

Is TA only suitable for short-term trades?
http://www.sharechat.co.nz/archives/...msg00165.shtml

[rotsevni]

Phaedrus, I went to this article thanks.
Just letting you know that this link in the article is dead:
"Technical Analysis from A to Z" at :- http://www.echarts.com/Learning/Library/
Pity, I was keen to read about the Q-stick indicator.
Do you have another link I can try? TIA

[Phaedrus]

Historical ShareChat posts are not able to be edited so I can't correct broken links. Some of the stuff there I wrote years ago - it's a wonder any of the links still work!

Here are some notes on the Q-stick indicator, cut straight from MetaStock :-
The Qstick indicator was developed by Tushar Chande. Qstick provides a way to quantify candlesticks. The distance between the open and close prices lies at the heart of candlestick charting. For those unfamiliar with candlestick charting, the body of a candlestick is black if today's close is less than the open; it is white if today's close is greater than the open. A majority of white candlesticks over a specified range is considered bullish, whereas a majority of black candlesticks over a specified range is considered bearish.
The Qstick indicator is simply a moving average of the difference between open and close prices.
For more information on the Qstick indicator, refer to the book The New Technical Trader by Tushar Chande and Stanley Kroll.
Qstick values below zero indicate a majority of black candlesticks (over the time periods specified) and therefore a bearish bias for the security. Values above zero indicate a majority of white candlesticks (over the time periods specified) and therefore a bullish bias for the security.
There are several ways to trade the Qstick indicator:
Crossovers. Buy when the indicator crosses above zero. Sell when it crosses below zero.
Extreme Levels. Buy when the Qstick indicator is at an extremely low level and turning up. Sell when the Qstick indicator is at an extremely high level and turning down. You may want to plot a short-term moving average on the Qstick to serve as a trigger line.

Divergences. Buy when the Qstick is moving up and prices are moving down. Sell when the Qstick is moving down and prices are moving up. You may want to consider waiting for the price to confirm the new direction before placing the trade.

[ruethewhirl]

Phaedrus,

I'd be interested in your opinion on what to do
when a share you're in goes bananas.

We all know what to do when a share trends down,
and we know to hold when shares trend up, but
what about when a share goes ballistic?

Some commentators would recommend you sell, as
on the balance of probabilities, when a share
is so far above its moving average it can only
spring back.

(Check out the ASX:Monadelphous thread to see
what I'm talking about)

[Phaedrus]

Only time will tell whether a sharp rise is just a flash in the pan, or the beginning of something really big. Because of this uncertainty, I advocate partial profit-taking in such circumstances. For (say) half your holding, move to a very short-term system using daily candlesticks and sell on short-term weakness using a system such as is described here :-
http://www.sharechat.co.nz/archives/...msg00167.shtml
How you trade the rest of your holding will depend on your reading of the future of the company. I would look at using a suitable moving average and a trendline to monitor the uptrend. You should probably use a log price scale. If you use neither of these indicators (or lack discipline) a Trailing Stop should be in place to save you from yourself if the uptrend should reverse. You can make this stop as tight or as loose as you like, but if it is triggered, you MUST exit.

[whiteheron]

I , like Phaedrus , take partial profits after a share has had a sharp rise in price as invariably in such a situation the price will overshoot and then pull back when things have quietened down
If this happens I then re assess whether a re purchase at the lower price is warranted ; sometimes it is , sometimes not , but by taking this course at least a portion of potential profits can be realised with the prospect of further profits over time on the balance of shares held

As I think is common I find when to sell much more difficult to establish than when to buy , especially for a share that has been showing a good uptrend but is ( probably ) reaching full value

[KJ]

With trading stocks, I tend to sell completely when a sharp rise in price takes place.(say about 10% quite quickly)I average 4 to 6 weeks in any one stock and see a sharp rise as a good opportunity to move on as more often than not the price will over shoot on the high side and then come back.

This is not always the case but it is what I do more often than not.

[duncan macgregor]

I still am inclined to sell to quick. I dont have a hard and fast rule about selling half, or the lot. I allow stop losses time lines to tell me to get out. When the share goes sideways in a trading range, i find that more times than not, i sell the lot, but not always. It depends if i have found a new home for the money, as i only invest a 50pc portion with a tight stop loss at the start, and the other half i place with something on a confirmed uptrend. I use fundamental analysis mostly in buying a new stock, and dig deeper than most, and get in before the trend. I will never buy a share on pure TA, i really dont trust the herd to come up with what to buy. The second 50pc goes on with straight out technical analysis when the herd tell me i was right in the first place. The fundamentalists are to concerned with the PE, and forget that it is the news in the pipeline that drives a share up. To dig deep and find that is the answer to when to buy. macdunk