Why bother about Financial Analysis when Technical Analysis already exists

Technical Analysis (TA) alone is not a suitable method for amassing wealth. Rather, it is fundamental analysis that paves the path for wealth creation through sharp-witted long-term investments. Nevertheless, TA is effective when it comes to accumulating quick short-term returns. It would tell you when the market is appropriate for entering or exiting.

As such, incorporating both technical and fundamental analysis will help you pick the most valuable stocks. Let’s take a look at the chart of the following company X:

Let us say a market participant identifies company X as a fundamentally strong stock to invest, and therefore invests his money in the stock in the year 2016. However, the stock doesn’t make any remarkable move till early 2018. That is, FA based investment in X did not give the investor any meaningful return during 2016-2018. The market participant would have been better off taking short term trades during this time. Thus both TA & FA should coexist as a part of your market strategy. In fact, this leads us to an important capital allocation strategy called “The Core Satellite Strategy.

To explain it better, suppose an investor has BDT. 500,000/-. This could be divided into ratios of 60 and 40. 60% of capital (equals BDT. 300,000/-) could be allocated for long-term investment in fundamentally strong investment grade companies. This acts as the nucleus of the portfolio which could be anticipated to grow at a minimum rate of 12% to 15% CAGR year-on-year basis. The remaining 40% of the balance (BDT. 200,000) can be used to initiate effective short-term trading bets with the help of Technical Analysis on equity, futures, and options. The Satellite Portfolio Strategy could be believed to generate a minimum absolute yield of 10% to 12% annually.