Ask Colin

Do you think there is too much emphasis on fundamental analysis?

It depends on who you are talking about.

If you mean by technical analysts, then I disagree strongly. I find that most technical analysts avoid fundamental analysis because it seems too difficult. In fact fundamental analysis adds important insights to what technical analysts do and their work would be the better for those insights if they took advantage of them. Too many technical analysts dismiss fundamental analysis out of a blind belief that theirs is the only 'true faith' and I hear things from them like the need to wash your mouth out if you even mention fundamentals. Technical analysts also readily dismiss fundamental analysis, because it seems to fail sometimes, but seem oblivious to the same defect in their own discipline.

If you mean by fundamental analysts, then I agree with you. I feel the same way about them in reverse. I believe that technical analysis could add important insights to what they do and that their work is the poorer for neglecting to look. Fundamental analysts have exactly the same blind faith in what they do and reject technical analysis out of hand. Their criticisms are sometimes well-founded, but again, they often overlook the same types of faults in what they do.

If you mean by professional investors, then I agree with you. They are nearly all basically fundamentals analysts. However, there is one big problem for professional investors. They have to be able to justify what they do in court if challenged. That means bringing in their peers to swear that they used the generally accepted methods. Since technical analysis is not generally accepted, they opt for being all wrong together, rather than perhaps being right, but in a way that can not be defended if challenged.

If you mean private investors, then I do not agree. However, they are somewhat a mixed bag. There are some dyed-in-the-wool fundamentalists and some rabid technicians. Private investors often seek the 'holy grail' in technical analysis methods that are nothing short of absurd. Some professional investors are also guilty of this. My view is that private investors should use both disciplines. They have somewhat more use for technical analysis than the professionals, because their information flow is far inferior and the charts may often alert them to what the professionals are doing with their better information and skills. Of all the groups discussed here, private investors have the greatest need to avail themselves of the insights from both disciplines. To the extent that they focus only on one discipline, they are cutting themselves off from the added value from the other discipline. To this extent, they put themselves at a disadvantage.

To my view I think there is a need for fundamental analysts to embrace technical analysis as well. However, this will not happen until we discard the lunatic fringe ideas and the whole subject becomes more scientifically-based. To break into their world, we have to expose our ideas to the scientific method and do the research and testing. So much of it is valid, but simply unproven. When asked for the evidence that it works, there is no rigorous research to point to.

However, my view is also strongly that technical analysts should embrace fundamental analysis to a greater degree than they do. This has been the focus of much of my teaching.