Chart Reading

From the Financial Times:

I have always found using technical analysis  the study of share price charts  in conjunction with fundamental analysis better than using just fundamental analysis on its own. I know that some people find it strange that someone who puts great emphasis on factors such as the quality of a business franchise, the strength of management and the valuation of a companys shares should put any weight on conclusions drawn solely from looking at share price charts. However, when I look at a stock, almost always the place I start is the price chart, normally a three or five-year chart. I like to put todays price in the context of its recent price history. I will look at a share completely differently if I know it has already performed well for several years, as compared with one that has not. When I discover a new interesting company or one I have not looked at for a while, the first thing I want to know is whether I am early in hearing the story or whether many investors already bought the shares having recognised before I did the factors that I might be considering. The price chart will normally tell me this at a glance. I am more wary of shares that have already done very well where a lot of the good news must already be in the price. Charts are good for screening, too. While I would not buy just on a chart view, a perusal of a number of charts can highlight shares that I might want to look at further from a fundamental perspective. Looking through a chart book can also give me some feeling for the attractiveness of a market overall. For example, at the time of writing, Japan appears to have more bottoming stock than most other markets. The way I look at technical analysis is as a framework or overlay into which I put my fundamental bets on individual stocks. I describe it as a discipline for my stock picking. In practice, this means that if the technical analysis confirms my fundamental views, I will probably take a bigger position than when they conflict. When I own shares in a company and the technical position starts to deteriorate, I will want to review my investment thesis to check that there is nothing that I am missing  such as negative factors I have overlooked. If my fundamental conviction is particularly strong, I will ignore the technical view. Otherwise, I might reduce my position. When I was running money, I liked to go through all the holdings in my fund from a technical perspective at least once a month and divide them into shares where the technical situation supported the fundamentals, shares where it conflicted, and those where there was no clear message. I have found technical analysis the most useful for medium-sized and particularly larger sized companies. In the case of the market leaders, it is often difficult to be on top of all the factors influencing the performance of the business and its shares. However, these all show as an amalgam in the share price. Large companies are undoubtedly the most challenging to analyse because they are the most complex. So I look at the technical situation as a summation of all the fundamental views available on a stock at that moment. It may sound surprising that, in my view, the precise system of technical analysis one uses is less important than the discipline of using charts in the first place. Most systems involve some kind of trend-following process which is linked to stock momentum and/or relative strength (shares showing relative strength are those outperforming the index). I am less keen on systems that just go on patterns, although I have found certain patterns such as V tops and bottoms occur again and again. I generally prefer line charts to point and figure charts but, again, it is very much up to personal preference. Charts tend to keep you in stocks that are doing well while forcing you to cut your losses  this is the great strength of technical analysis. Also, it is not easy to sell a stock that you like fundamentally but which has not performed well. However, analysing a chart may help you to do this. As well as showing the share price history, charts are the best way to display much of the fundamental, economic, sentiment and other types of data that we look at when assessing shares. They are quick to read and the mind can assimilate a lot of data in one go. This is important in the information-overloaded world that most investment professionals live in today. One ignores the chart at ones peril. Anthony Bolton is president, investment, at Fidelity International. His Fidelity Special Situations fund has been the top performer in its sector since its launch in 1979. He was manager of the fund for more than 27 years and now has a full-time role mentoring Fidelitys younger fund managers and overseeing Fidelitys investment process.

One thought on “Chart Reading

  1. This is an amazing “admission” by one of London’s best respected fund managers. Most still pretend to be 100% fundamental, but Fidelity have had their “chart room”, and have employed technical analysts, for years. Maybe it’s the secret of their success? Obviously not all technical analysis means “trend following” but I think the article highlights that he only does “trend fighting” in exceptional circumstances..

    Thanks Michael

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