The two theories of investment

By Hammad.U.Khan
Worried about stock pricing?, what really prompt fluctuations in stock prices In
upward, downward or no trend at all?, both Fundamental and Technical analyst of
fer explanations contrary to each other but relate to the same end in some ways.
Through out the history of investment, the two dominant schools of thought have
always played cardinal role in determination of the valuation of the stocks, the
matter is not only confined to the determination of stock price, but it goes fu
rther to find arbitrage opportunities to buy at lower and sell it at higher to a
mass a great fortune. Investment can no longer be done without fundamental and t
echnical analysis due to perplexing behavior of stock markets and indexes far be
yond the comprehension of an ordinary person.
Why Fundamentalists are so popular?
Fundamentalist studies the external factors which affect the supply and demand o
f a particular market, the purpose of studying the forces of demand and supply f
or a fundamentalist is to predict a change in the market before it has actually
occurred. They study the Financial Statement, Financial Ratios such as EPS (Earn
ing per share) and ROA ( return over asset),which helps them to judge the contem
porary financial conditions of a firm on the basis of which stock could be purch
ased and sold.
They are mostly academicians, brokers, analysts and researchers, a vast majority
of wall street is fundamentalist, they were responsible for bringing Billions o
f Dollars investment poured into the real estate which resulted in boom prior to
2008 recession, but they encountered a fiasco for not being capable of predicti
ng the burst that stricken the planet finance which resulted in credit crunch, s
o called recession, followed up with unemployment on a large scale, bankruptcy b
y mortgage payers and some of the biggest names on wall street collapsed which e
xasperated the situation.
Technical analyst, an astrologist or a trader?
Technical analysis is contrary to fundamental analysis in a sense that they stud
y the price behavior which reflects all forces affecting market demand and suppl
y, they use tools such as price charts which could be intricate hand written cha
rt appearing alike an astrologist chart trying to predict the in future prices i
n the market by observing historical movements of the prices.
They keep adhesive eye to the stock pricing movements on daily basis, but this i
s not just enough about technical analyst, there is another form of technicians,
called them selves, the traders or trend followers.
How astonishing could it be?, if we could predict the current trend, the current
trend which does not even exist or it's just simply a psychological explanation
of our current actions stimulated on the basis of our past observations of tren
ds, a legendary trader Edseykota says "trends are historical can not be predicte
d in present, trend following is a trading strategy", if current trend is nothin
g, then how come a smart trader could predict it and earn a great fortune out of
it,?, an unambiguous explanation to this could be that the traders do not trade
on every day basis, they wait patiently to discern the moment to put forth thei
r investment when the trend is favorable, they could sense the right moment to t
rade.
Trading VS Investment
A fundamentalist may be more concerned with investment, a longer commitment of f
unds, if the future was not so unpredictable, surely, our investments would gene
rate a greater return, this is what happens exactly when the economy is in good
condition, people have excess to save the money and invest it in the capital mar
ket fostering higher returns in terms of dividends or capital gains, however, wh
en the black clouds begin to prevail, investor hardly have an idea to protect th
em salve against the loosing price of holding stocks, one effective strategy cou
ld be hedging to reduce adverse price movement, but it can be very expensive, th
ey do not bother to learn about short selling which the traders are indulged in,
which is highly risky venture but the return satiates the risk. The opportunist
ic traders It could be agued that traders were not stricken harsh by financial t
urmoil in 2008, when people lost billions of Dollars at wall street and other fa
mous stock markets and indexes of the world crumbles The trend followers do not
trade every day, rather, they find the right conditions to trade, a trader may n
ot have performance goal such as earning a certain amount a day, they invest in
different industries varying from Forex market to oil industry, the trading prog
rams help them to make buys and sells that human might be slow to respond due to
emotional biases
Conclusion
The complicated behavior of the market and the uncertainty of the financial worl
d demands all the participants to effectively hedge against the risk, an perfect
ly hedged portfolio may protect against the inherited risk which is just no more
market, purchasing power or interest rate risk, but rather a macro level Econom
ical risk that could wipe out investors without effective hedging. Another effec
tive approach to this situation could be follow up the hybrid approach to invest
ing, which is merely incorporating technical trading strategies along with inves
tment strategies of the fundamentalist so that fortune could be earned when ther
e are trends for it, cognizance to short selling is inevitable, though short sel
ling is also an art that requires considerable working.