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Fundamental_Technical_2_29_16

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Fundamental_Technical_2_29_16

  1. 1. Fundamental vs. Technical Analysis: The Ying & Yang of Equity Security Valuation Prepared by: Allen D. Hahn, CFA, CMT February 29, 2016 Discussion Topics  Introductions  What is Value ?  Do you want to be a Fundamental or a Technical Analyst?  Practical Applications of Technical Analysis  Questions
  2. 2. What is Value? Desirability Monetary Unit Moral Principles or Beliefs Result of a Function or Operation Graduation of Tone To Have High Regard For 2  Many different meanings; no universally accepted definition  A value judgment is often placed in context  Value may change depending on the context in which it is being measured
  3. 3. Why Do Equity Securities Require Valuation? Buy-in/out of Professional Partner Fairness Opinion to Board of Directors Inclusion in an Investment Portfolio Dispute Resolution SEC/GAAP Financial Reporting Requirements Capital Funding/Bank Lending Market Trading Taxation 3  Equity securities require valuation in many different context  Different “rules” will be applicable to formulating a view on value
  4. 4. Differing Philosophies of Equity Security ValuationSecurity Valuation  Methods used to analyze securities and k iFundamental analysts believe make investment decisions are broadly classified as either fundamental or technical analysis Fundamental analysts believe securities are priced according to fundamental economic data  Radically different schools of thought followed by professionals in the investment industry Technical analysts think investor behavior and supply and demand factors play the most important role 4
  5. 5. How Does a Fundamental Equity Security Analyst Approach Valuation? 5  Attempt to study all related economic, financial and quantitative factors affecting the company’s business  Fundamental analysts emphasizes the financial and competitive position of the company  The fundamental analyst believes that there is an intrinsic value (inherent worth) of an equity security  Fundamental analysts view the optimism and pessimism of the crowd as “noise”
  6. 6. The “Bottom UP” View of Fundamental Valuation Analysis 6  Paradigm of a fundamental approach to equity security valuation  The focus of “bottom up” valuation is the financial position of the company  Financial statements, SEC reporting, management documents and independent due diligence provide input information to the analyst  Methods of valuation include an income, market and adjusted balance sheet approach to derive intrinsic value
  7. 7. How Does a Technical Equity Security Analyst Approach Valuation? 7  Analyze statistics generated by market activity  Technical analysts do not attempt to measure the intrinsic value of an equity security but to measure its supply/demand characteristics  Technical analysts use statistics, chart patterns and other tools to predict the future direction of an equity security
  8. 8. The “Top Down” View of Technical Valuation Analysis 8  Paradigm of a technical approach to equity security valuation  Focus of ‘top down’ valuation is the supply/demand indicators for an equity security  Price tendencies, momentum, confirming data and support /resistance areas are key input information  Methods of analysis include moving averages, price indicators, analogues, form and cycle analysis
  9. 9. Does All this Mean that One Valuation Approach is Better than the Other? 9  The decision to use fundamental and/or technical analysis is based on the purpose of the valuation  Not only is it important to understand technical analysis, an understanding of the company’s financial position is typically relevant in the valuation process  Technical analysis will not represent the intrinsic value of a company because the price of securities can move in an irrational manner  Knowing how to perform both fundamental and technical analysis is essential for both investors and traders
  10. 10. Tendencies of Fundamental and Technical Analysts Fundamental Multi-disciplinary Creative Research (qualitative) Team orientation Institutional Theoretical finance Technical Quantitative Rules-based Research (quantitative) People orientation Individualistic Psychology/Behavioral Finance 10
  11. 11. Technical vs. Fundamental Analysis: Which Approach? 11  Availability of information is key criterion on which approach to use  Purpose of the valuation will also channel decision making  Investment time horizon Fundamental Technical Closely-Held Large-Cap GlobalOTCBB Small Cap Mid Cap Large Cap
  12. 12. The Opportunity to Exploit the Mispricing of Securities 12  Technical analysis is often more reliable and predictable in the short-run, whereas fundamental analysis is longer-term oriented.  Time horizon: short- term (days); intermediate-term (months); long-term (1.0 yr +)  Long-term forecasting with technical analysis
  13. 13. Tools of a Technical Analyst: Indicators 13  Literally hundreds of price monitoring tools that will generate buy and sell signals  Chart patterns, form models, moving averages, cycles, indicators, oscillators, among others  Price momentum indicators are common tools in technical analysis  MACD relies on a moving average cross- over system to indicate the likely direction of future prices
  14. 14. 14 Questions?

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