Technicals vs. Fundamentals: It's all about risk management

One of the most debated topic in stock investing is whether to use technical or fundamental analysis. To me, its a non-issue; both analysis are as important. In simple language, technical analysis tells us when to buy whilst fundamental analysis tells us what to buy. Investors should use both in coming up with their investment decisions. In fact, even "purist" on either sides cannot ignore the fact that they use both analysis in arriving at their conclusions. Investors who use fundamental analysis will ultimately based his/her decision on certain fair value assumptions which is based on price. On the other hand, investors who use technical analysis will refer to certain fundamental reasons - be it a hot tip, rumors, earnings news etc. in choosing which stock to chart.

Investing is not an exact science. No system can predict with certainty which way a stock price will move. It boils down to probability. The most important thing, to my mind, is how risk is managed. As a regular reader of Finance Manila , I suggest to keep a close watch on the posts of agent_tracker and Mark T. Market. These guys are good in presenting their arguments using both technical and fundamental analysis.

Previously, I talked about how I apply the "rule of 3" in allocating my portfolio into three groups of stocks based on expected returns: speculative, long term and patient bets. Please read: Rule of 3 I also follow the "rule of 3" in building my stock position. As a rule, I buy stocks in quantities that are divisible by 3. This allows me to divide my holdings into three, 1/3 positions. The first 1/3 is my "trading" position whilst the other 1/3s are my "core" and "insurance" positions. The trading position is for me to trade out the price range whilst waiting for the price to go up. By doing so, it helps me lower my average cost and at the same time hedge my bets just in case things go wrong. On the other hand, my "core position" is what I long until the stock reaches my target price. Finally, my "insurance position" is what I keep after I sell my core and trading positions. Most likely, by that time, the "insurance position" has zero cost in my books. So whatever happens, I have already realized the full benefit of my position.

Thus, by combining technical and fundamental analysis, one gets to manage portfolio risk. In the end, it is not about winning all the time but more about winning most of the time that matters.

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