Please, someone tell me what it is with fundamentalists! I mean, what exactly is sticking in their craw that compels them to send me emails with messages that basically say they are right, they are superior, and they have descended from the heavens, while I -- poor ignorant TA
that I am -- am basically a moron!
Look let's just stipulate up front that I
a moron. Fine, I'll give you that one. However, the real point is that I don't feel compelled to send emails to
, and the
saying, "You buy-and-hold fundamentalists are SUCKERS! You have it all wrong! The charts tell all, and if you don't believe me, then go out and short
No, I sit here, mind my own business, and I let the fundamentalists do their own thing. It's a big world: They have their way, I have mine. I mean, we're all working on the same goal, aren't we?
But every once in awhile, I get a zinger that calls for some response. And as I'm the de facto TA poster boy, I will stand up and fight! Yes, fight for truth, justice and the TA way!
I mean, gosh, if you're going to put your bucks into any kind of strategy, doesn't it behoove you to know what you do and why you do it so thoroughly that you are completely confident in your approach?
Of course, that doesn't mean you should bury your head once you think you have things knocked. No sir. You should pay attention to the critics (at least the polite ones) and constantly examine what the heck you're doing!
That's why this email from reader
was a good wakeup call. I wanted to discuss TA versus fundamentals anyway, and this column presents a good first step.
Gary, Analysis of stock charts for pure short-term gains/losses is a completely fruitless venture and a great way to promote day trading, which itself is a terrible waste of effort. Investors are better served through mechanical models and subjective analysis that influence a buy-and-hold philosophy, not only for better long-term returns, but also for a better life. Life has too much to offer to waste it sitting in front of a computer screen listening to charts that show, "Buy, buy! Sell, sell!" Come on! You're analyzing when to get into companies like Starbucks (SBUX) - Get Reportand Dell (DELL) - Get Report? Those are both, by the way, fantastic companies with superb futures. Do you honestly think your technical analysis could have predicted just when to jump in and out of those stocks over the last, say, five years? Do you think your returns (tax adjusted, mind you) would have beaten the investor who just bought shares five years ago and held onto them, through thick and thin? No way. So why don't you try influencing investors in a positive way like, for instance, the Motley Fool contributing writers do: through analysis of companies based on sound logic, mechanical models and a bit of human intuition. Then choose a few to buy and hold for the long term -- at least five years. That is the investment approach that will reap the most rewards, mentally, physically, and materially in the end. Regards, Jeremy Brunn
Okay, now that you a feel for Jeremy's viewpoint, let me break apart his email, a la
James Cramer, and give you my rebuttal.
"Analysis of stock charts for pure short-term gains/losses is a completely fruitless venture..."
Well, in the style of my neighbor at 1600 Pennsylvania Avenue, I'd have to counter with, "It depends what you mean by 'fruitless.' " If it's fruitless in the financial sense, I can only fall back on my own track record: The past three years I am up 68% a year compounded. Better than some, I'm sure, and not as good as others. But, whatever, it certainly hasn't been fruitless. Even after taxes!
"Analysis of stock charts ... is a great way to promote day trading, which itself is a terrible waste of effort."
Hmm, I think my stance on day trading is pretty clear in that I'm not a big supporter. (See my May 3
column for relevant links.) However, I'm not dead set against it either. It's a way -- certainly a very difficult way, but a way -- to make a buck. There are day traders who have made millions in a year. I'm not certain they'd agree they've been wasting their time.
"Investors are better served through mechanical models and subjective analysis that influence a buy-and-hold philosophy. Not only for better long-term returns..."
Maybe, maybe not. The only valid measurement is the bottom-line increase in your equity over time. Some buy-and-holders do very well. But so do some traders. If there's ever a definitive accounting of one camp versus the other, I'll certainly be the first to send in my yearly numbers. But until then, we're all just guessing.
"... but also for a better life. Life has too much to offer to waste it sitting in front of a computer screen listening to charts that show, "Buy, buy! Sell, sell!" Come on!"
Personally, I agree with this statement. On the other hand, who really gives a hoot what Gary B. Smith or Jeremy Brunn thinks is a "better life?"
Listen, I love the bully pulpit as much as the next guy, but I try to stay out of lifestyle judgments for anyone outside my own family. If it's legal and not harmful to others, than who I am to say that there's a better life than simply staring at a computer screen? Maybe for the poor guy who spent 30 years working for "the man," all to get a crummy watch and a decent pension, it's an absolute joy to be able to answer to no one except Mr. Market. Maybe the adrenaline rush gives the guy some excitement in his life.
"You're analyzing when to get into companies like Starbucks and Dell?? ... Do you honestly think that your technical analysis could have predicted just when to jump in and out of those stocks over the last, say, five years?"
Uh, humbly, yes. Would I be right every single time? No, but certainly enough to make a decent buck trading both of those stocks, which in fact, I have done.
"Do you think your returns (tax adjusted, mind you) would have beaten the investor who just bought shares five years ago and held onto them, through thick and thin? No way."
Ah, this is always the crux of the buy-and-hold, fundamentalist argument: "Your in-and-out trading just doesn't cut it against buying an
or Dell five years ago and holding!" And you know what, Jeremy? You're absolutely, 100%, totally correct. Heck I can't even stack up against buying eBay and holding five months ago!
But, here's the flaw in that kind of logic: It's all backward looking. I mean, sure, if I had known then what I know now, I'd have bought Dell in 1993 -- at full margin no less -- and simply held it. God, I'd be the smartest trader/investor in the world.
The problem is I didn't know then what I know now. So at some point, you have to do your homework, pick some stocks, and if you're buying and holding, well, hope it all works out. Look, I'm sure there are quite a few folks who
buy Dell years ago and are now zillionaires. Those folks are plainly smarter than I.
But let's wipe the slate clean and assume this is Day One for you as a new buy-and-hold, five-year investor. So, which stocks? And, more importantly, when?
I know your next statement: Do your homework, analyze the companies, blah, blah, blah. Okay, fine, so let me take a short cut and say the Motley Fool -- to use your reference -- has the right approach. So then do I load up on
, AOL, eBay, et al. now? What if I had acted back in early April, and now found myself down, on average, 30% with my investments?
Yes, I know, just hold on and all will be fine. I suppose I could just as easily have gone long in October, and I'd be singing their praises.
But, it really doesn't matter what the final returns are because here's what's missing from everyone who's ever sent me a "buy-and-hold rules!" Email: the human element. Trading, investing or any combination thereof not only has to match your financial goals, but also your personality.
Yes, I could labor away and find a few good stocks to hold "forever." Heck, I've done that twice now, having picked AOL at the first
Investment Summit and
this past October. But, personally, I didn't have the nerve to hold them for any serious length of time.
So, call me a dumb investor, but I have to sleep at night. And, frankly, I have a difficult time sleeping knowing that the market could open up limit-down the next day and my wonderful portfolio of "permanent value" stocks could be down 50% in a matter of days. Sure, yeah, they'd probably bounce back. Unless they didn't.
Case in point is
-- the DELL and SBUX of its time -- that I bought in 1991, promptly doubling my money. But sticking to my fundamental buy-and-hold philosophy, eventually I saw myself
50% by 1995. And now in 1999, it still hasn't hit those highs it set in 1992.
And for that very reason, Jeremy, I think it's beneficial to trade. In fact, it's a much better match for some folks than holding permanently because many, if not most people will, in fact, NOT hold permanently. No, they'll sell at the worst possible time: when they can't stand it anymore.
Me? I know I'm human. So within those confines, I built a methodology that maximizes my profit while also minimizing my nerves. You, on the other hand, advocate a style that is perfect, assuming you're smart enough, patient enough and can stand the heat better than the New York Fire Department.
The bottom line is that you assume no human frailties, while I assume the exact opposite. You might have numbers on your side, but I am confident I have human tendencies on mine. If you believe human tendencies are important and impact the market, you begin to see just how important and critical it is to be an expert on TA because, Jeremy, TA is simply the analysis of human tendencies.
Think DELL is worth only 75% of what it was just three short months ago? Who knows, and it doesn't really matter because it's everyone's perception of DELL -- not its fundamentals -- that are driving this stock for the short term. And it's those perceptions that TA analyzes, and, if you're a competent trader, takes advantage of.
"So why don't you try influencing investors in a positive way like, for instance, the Motley Fool contributing writers do: through analysis of companies based on sound logic, mechanical models and a bit of human intuition. Then choose a few to buy and hold for the long term -- at least five years. That is the investment approach that will reap the most rewards, mentally, physically, and materially in the end."
Jeremy, I'd only ask that you go back and read any and all of my
columns. Sound logic, mechanical models, human intuition? Why, other than the five-year holding period, my columns talk about those exact ideas!
In fact, I am willing to bet I have a number of fundamentalists who are regular readers of this column. Because, as I said at the beginning of this column, when you cut past the charts and trend lines, aren't we all really working on the same goal?