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Fundamental vs Technical Analysis of a Stock


The biggest dilemma for any equity investor is to select stock based on Fundamental analysis or Technical Analysis. It is similar to fight between a heart and a mind. After studying fundamental and technical analysis of large no of stocks, i can conclude that in reality it is Very Difficult. Unfortunately, it is very time consuming activity to spot a stock which is both fundamentally and technically strong. I am not saying it is impossible. Once you identify such stock then trust me that you hit the jackpot. When i started investing in Stock market, my father told me that it is “Satta Bazaar”. After 8 years, i beg to disagree with him for the first time in life. These days you must have observed Kapil Dev’s ad on Business Channels stating stock market is a “Mind Game”. I agree completely.

I have seen people making fortunes in the stock market but trust me they do follow either fundamental analysis or technical analysis. As i have seen that Stock Analysts are either Technical Analysts or Fundamental Analysts. But i have a strong feeling that it’s a mix of both. Lastly, a candid opinion from my end that whatever Stock Tips or Recommendations available for FREE in the public domain are misleading. The best examples are L&T, ICICI Bank, Lupin or Sun Pharma. They were once darling of analysts but are now orphaned. Orphans like PSU Banks are back in flavor. Simply, you cannot trust analysts as they simply pick up existing trend and recommend without any basis/ground. For example, all analysts were blindly recommending a PVR stock after a good run. Fundamentally, it is very costly at P/E Ratio of 62 against an industry average of 43. Price to Book Value of 9.41. Though technically it is very strong. As i mentioned to make money, a stock should be strong on both the fronts. One fine day, the stock fell 10% after the exit of one of the foreign investor. After burning my fingers, i stopped following recommendations and stock tips long back. If i am spending 8-10 hours every day then i expect at least per a return of  3% to 4% every month on my investments. Do remember, only experience can make us wiser.

Fundamental Analysis of a Stock

Essentially fundamental analysis involve study of financials and key ratios like P/E (Price to Earning) ratio, P/B (Price to Book Value) of the stock, Beta of the Stock, Dividend Yield, Debt etc. I will discuss the fundamental analysis in detail in one of my future posts. For current post, it is imp to note that stocks with low P/E and P/B are attractive. Low P/E means high earning yield in future and low P/B means the stock is undervalued. Beta indicates the stock volatility. if is more than 1 then it means the stock is more volatile than the market. Similarly, high Dividend yield and debt free companies are considered fundamentally strong. You need to study all parameters in conjunction with each other. It is easy for layman investor to carry out fundamental analysis compared to technical analysis.

Technical Analysis of a Stock

Technical analysis is a bit difficult to understand. Even a seasoned investor find out difficult to draw a conclusion based on technical analysis. Technical analysis consist of indicators like

(a) RSI: Relative Strength Index

(b) MACD: Moving Average Convergence Divergence

(c) Simple and Exponential Moving Averages

(d) Bollinger Bands

(e) Fibonacci Retracement

(f) Average True Range

(g) Average Directional Index

Above mentioned are some of the critical indicators but there can be as many 20 technical indicators. Technical Analysis basically establish the trend and strength of the stock from trading perspective. I will discuss the technical analysis in detail in a dedicated post. Again you need to study all the parameters of technical analysis in conjunction with each other.

Fundamental vs Technical Analysis

Though the objective of both the analysis is different but based on my experience, i can say that risk-free approach is to consider both. The only issue is that it require a lot of analysis and it is mentally exhaustive exercise. At the same time, it is the safest bet. Also, i would like to add that my stock portfolio consists of stocks which are both fundamentally and technically strong. Only exceptions are L&T and IDFC as i am anticipating value unlocking in near future. Based on experience, my conclusion is as follows

1. Time Horizon:

Fundamental Analysis is more relevant from a long-term investment perspective. You can analyze the growth potential of the company. If you are planning to hold the stock for more than a year or so then you should give more importance to fundamental Analysis. Also, it is not necessary that stock of the fundamentally strong company is performing very well i.e. providing best of returns. Best examples are Coal India, IDFC etc.

On the other hand, Technical analysis is more relevant and suitable for short term trading i.e. few days, weeks or a month. It is not necessary that stocks which are technically strong are fundamentally strong and vice versa. In other words, these are stocks which are in Bullish trend and you can make some quick money. Best examples are Indiabulls Real Estate or Essar Oil.

2. Timing of Investment:

If you are investing in fundamentally strong stock then you can invest any time. You need not time the market. It is advisable to initiate value investing in this stock to hedge risk. These stocks are normally defensive stocks and don’t expect exponential returns. Last but not least, always remember that Stock Market is more sentiment driven than fundamental driven. Fundamentally strong stocks like ONGC, Tata Motors and Tata Steel are beaten down by negative sentiments which in turn impacts fundamentals.

It is critical to time the investment if you are investing in technically strong stocks which are fundamentally not so strong. It is advisable to start an investment with low value and you can keep increasing the investment based on run up of the stock. These stocks may move up 5%-10% in the week to 10 days time. On reversal of the trend, they may come down faster if fundamentals are weak.

3. Monitoring:

You can monitor fundamentally strong stocks on quarterly basis whereas technical strength is like a bubble. A trend may reverse fast therefore, it is advisable to monitor on a daily basis. On reversal of the trend, exit immediately.

4. Risk

Fundamentally strong stocks are relatively less risky compared to technically strong stocks. As i mentioned that best and safest bets are stocks with best of both the world.

Words of Wisdom: As i mentioned that markets are driven by sentiments. Sentiments can make or break the fortune of any stock. All the analysis rest in peace against sentiments. I have given examples wherein sentiments worked against the stock. Any kind of analysis should be a good entry point, but an exit is normally sentiment driven. Poor results from very good company can change the tide because Yeh Dil Mange More!!!. As i mentioned in my post, Why it is imp to book profits in Stock Market? that markets are more volatile than the past. The situation will worsen in future due to the interdependence of world economies. Someone sneezing in China may cause flu in India.

Disclaimer: Among all the stocks discussed in this post, i have a position in L&T and IDFC. The objective of this post is only to create an awareness.and educating investors about the Subject matter. The views and opinion expressed on this website are my personal views and is NOT an investment advice/Stock Tips whether to buy, sell or hold the shares of a particular stock. All investors are advised to consult their investment advisor and/or conduct their own independent research into an individual stocks before making any decision. I am not responsible for any loss or implications arising out of any decision taken by the readers after reading my post.

Copyright © Nitin Bhatia. All Rights Reserved.

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wilfredfranklin .
wilfredfranklin .
8 years ago

Very informative article Sir ! Thanks for sharing . As someone who is trading for a living i agree with all your points :-)

Narendra khadse
Narendra khadse
7 years ago

Thanks for sharing. You have given very nice and appropriate information, easy to understand by common man.keep it up…all the best to you.

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