Ask Colin

I am a regular reader of your section in the Shares magazine. I am currently looking at Telstra as a good defensive buy at this time . I noted that you predicted it could go down as far as $4.00. I was wondering if you would mind elaborating further as I can't see how that would occur given that it is well supported by the mums and dads. I also think whoever is elected will not increase regulatory control. I enjoy your articles, although I am not a technical analyst myself. I look to the fundamental analysts for guidance.

I am not a licensed investment adviser, so I am prohibited from giving advice to individuals directly. What I write in Shares is as a journalist, where it is clear (and specifically covered in the law) that I am not addressing any single person. Even if I was a licensed adviser, the law would prevent me from legally answering your question, because I would be required to advise you only when I first knew your complete financial situation. So, I am unable to comment on Telstra specifically. However, you do raise some general issues that I can comment on:

Prediction

I don't make predictions. Indeed, I believe most strongly that it is impossible to predict markets in the sense that you can forecast what price a stock will go to at a specific time. It is possible to make lots of predictions. If you make enough of them, some will be right. You can then develop a reputation by only talking about the ones that turn out to be right in hindsight. Beware of anyone claiming to predict markets.

What I actually said in October 2001 Shares was:

There is talk in the media of analysts warning of a $4 price for TLS. This is entirely consistent with the trend channel.

I don't think this can be construed as me predicting a $4 price. I try to express myself precisely and all I said was that the predictions of others were consistent with a trend channel. This was never intended to say I agreed with the prediction - only that it was possible technically.

Support by the Mums and Dads

The Mums and Dads have been supporting it all the way down. I see no way to assess when this support is likely to become effective.

There is an old saying in the markets that we all tend to "talk our book". This means that we tend to select information that supports what we want to believe and to put it forward to rationalise our position. In the same way, we tend to ignore or downgrade the importance of information that is at odds with what we want to believe. Part of the art of investment is to train ourselves to see both sides of the situation. Remember that for every buyer there is a seller. We need to teach ourselves to enquire why the seller would be offering the stock to us.

Election

You may be right, but see the previous discussion.

Charts Vs Fundamentals

It may surprise you that I agree with you about the importance of fundamentals. This is because my brief to write in Shares is as a technical analyst (chartist). So, I am not at liberty to discuss fundamentals. This is left to others, who I may or may not agree with at any time.

However, in saying this, let us be clear about the way in which the two forms of analysis are complementary rather than opposed in any way.

Fundamental analysis is about determining "intrinsic value". This tells us which way the share price should move. The problem is that markets are driven by other things than value, because people do not always react entirely rationally as economic theory assumes. Hence the new field of Behavioural Finance (three academics won a Nobel Prize in Economics this year for their work in this field), where we look at how people actually behave. Much of this work is causing many academics to admit that we need to study real people and technical analysis seeks to do that by studying the behaviour of market participants as shown on charts. So, we can try to see what buyers and sellers are actually doing as they are driven by fear, greed, ego, hope and so on.

Technical analysis then is about determining what is happening and when it is happening. This goes to timing and adds value to fundamental analysis which tells us nothing about timing, but only the likely direction of prices.

There is much more to this that there is not space to discuss, such as the difficulty of calculating "intrinsic value" (for example how the "independent" experts on either side of a takeover can come up with such different figures for value) and the way value changes quickly over time as new information becomes available.

I hope this helps you understand where I am coming from in my columns.

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