Ask Colin

If technical analysis is so sound that one may largely disregard fundamental analysis, why aren't there any managed funds that explicitly sell the fact that they only employ technical analysis in trading stocks?

There are a number of reasons why there are no funds relying only on technical analysis:

1. Technical analysis is not generally accepted as a technique for analysing and trading markets. This is a bias that is very pervasive in the industry and flows from academic teaching over the last half century in particular. However, there is increasing academic acceptance that there may be more in technical analysis than has been assumed. For example, there is a good, though brief discussion in Jeremy Siegel's book Stocks for the Long Run Chapter 16. There is also the growing field of behavioural finance, which is tending to validate some of the ideas on which technical analysis is based.

2. Fund managers have to protect their backs. If they were to be sued for poor results, they need expert witnesses to stand up and say that they used generally accepted practice in running their fund. Technical analysis is not the generally accepted practice, so it would be difficult to win such a case. The safer course is to say they use one of the accepted fundamental approaches, even if they tweak it with technical analysis.

3. Technical analysis is not a stand-alone methodology any more that fundamental analysis is. Fundamental analysis tells you what stocks appear to be good, but not when the market will recognise that fact. Hence, it works mainly for buy-and-hold approaches. Technical analysis is strong on timing, but weaker on investment merit. Hence, they are best used together as a complete method.

4. I believe that a purely technical analysis driven approach is extremely dangerous. It is my firm view that some level of fundamental analysis is necessary. I see many people lose money using technical analysis, because of ignorance of the fundamentals. Of course, they are often also lacking in money management and discipline as well. However, to trade anything without knowing what it is and its basic fundamentals is to court disaster.

For all these reasons, it would be really stupid of a fund manager to take a purely technical analysis approach. There are even pressures that make it dangerous to even say they rely heavily on technical analysis. However, some hedge fund managers will do what you say. They are a different animal altogether and not available to the public - only to so called "sophisticated investors". I still doubt that a hedge fund manager who timed trades entirely on technical analysis would be doing so without knowledge of the fundamentals for the instrument he was trading.

The main group who try to rely on technical analysis only are the "punters". They do it because they think fundamental analysis is too hard, rather than any exploration of the problem that proves the technical approach works by itself. It is estimated that at least 90% of them lose their money. I am not surprised.

Keyword: