Page 175 - DCOM504_SECURITY_ANALYSIS_AND_PORTFOLIO_MANAGEMENT

Fundamental
Technical
S.No.
His perspective is long-term in nature. He is
1.
aggressive. He acts on ‘what is’.
conservative in his approach. He acts on His outlook is short-term oriented. He is
‘What should be’.
2. He adopts a buy-and hold policy. He does He believes in making a quick buck. He
not usually expect any significant increase snuffles his investments quite often
in the value of his investments in less than a recognizing and foresees changes in
year. stock prices.
Security Analysis and Portfolio Management
3. He considers total gain from equity He does not distinguish between
investment consists of current yield by way current income and capital gains. He is
of dividends and long-term gains by way of interested in short-term profits.
capital appreciation.
Notes
4. He forecasts stock prices on the basis of He forecasts security prices by studying
economic, industry and company statistics. patterns of supply of and demand for
The principal decision variables take the securities. Technical analysis is study of
form of earnings and dividends. He makes stock exchange information.
a judgment of the stock’s value with a risk-
return.
5. He uses tools of financial analysis and He uses mainly charges of financial
statistical forecasting techniques variables besides some quantitative
tools.

6.3.1 The Critics

Some critics see technical analysis as a form of black magic. Don't be surprised to see them
question the validity of the discipline to the point where they mock its supporters. In fact,
technical analysis has only recently begun to enjoy some mainstream credibility. While most
analysts on Wall Street focus on the fundamental side, just about any major brokerage now
employs technical analysts as well.
Much of the criticism of technical analysis has its roots in academic theory – specifically the
efficient market hypothesis (EMH). This theory says that the market's price is always the correct
one – any past trading information is already reflected in the price of the stock and, therefore,
any analysis to find undervalued securities is useless.

There are three versions of EMH. In the first, called weak form efficiency, all past price information
is already included in the current price. According to weak form efficiency, technical analysis
can't predict future movements because all past informations have already been accounted for
and, therefore, analyzing the stock's past price movements will provide no insight into its
future movements. In the second, semi-strong form efficiency, fundamental analysis is also
claimed to be of little use in finding investment opportunities. The third is strong form efficiency,
which states that all informations in the market are accounted for in a stock's price and neither
technical nor fundamental analysis can provide investors with an edge. The vast majority of
academics believe in at least the weak version of EMH. Therefore, from their point of view, if
technical analysis works, market efficiency will be called into question. (For more insight, read
What Is Market Efficiency? and Working Through The Efficient Market Hypothesis.)
There is no right answer as to who is correct. There are arguments to be made on both sides and,
therefore, it's up to you to do the homework and determine your own philosophy.
6.3.2 Superiority of Technical Analysis

Technical analysts differ in their views about fundamental analysis. Those who depend exclusively
on technical analysis, criticize fundamental analysis as follows.
1. Fundamental analysis is hard and time consuming work. Technical analysis, on the other
hand, requires less schooling and is easier to use.
2. Fundamental analysis is based on inadequate income statements and highly subjective
nature of earnings multipliers.
3. Fundamental analysis is right in its assertion that security prices fluctuate around their
intrinsic values. But even if a fundamental analyst does find an under-priced security, he
must wait and hope that the rest of the market recognizes the security's true value and bids
its price up.

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