Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 63

Technical versus fundamental analysis in equity markets

Investors have many different characteristics. At one extreme, high frequency traders rely on technology to place orders with lightning speed and eke out a small percentage profit on huge numbers of small trades in the margin between buyer and seller. At the other extreme, patient, long-term value investors are happy to leave a good stock in the bottom drawer for years or decades, and allow compound returns to work their magic. In between these extremes, there are perhaps as many different investment styles as there are individual investors.

Work out where you sit

One of the major differences divides technical investors (or chartists), who work on the assumption that historical price movements reveal likely future movements, from fundamental (or value) investors, whose focus is future profitability and cash flow. Certainly, there are investors who employ both styles, but most people tend to identify with one or the other. Working out where you sit is one of the more important choices an investor makes.

The two approaches enjoy different levels of acceptance in different parts of the market. Charting can be a relatively simple way to assess the investment merits of a company. Time-poor investors can make decisions more easily and entrepreneurs can design trading ‘systems’ for such time-poor investors. As a result, charting enjoys good support amongst retail investors, and receives quite a few column inches in mainstream media.

In the professional funds management arena, the norm is for analysts and portfolio managers to spend large amounts of time studying the details of company financials and business models. Montgomery Investment Management, along with most of our colleagues in the industry, sits firmly in this fundamental camp. We do this with the expectation that investing time and effort into having deeper insight into a business will yield better investment decisions.

A good question for investors and fund manager clients to ask is: does this extra effort and cost add enough value to be worthwhile? If a simple approach delivers reasonable results, why bother with the hard way?

There may be no single right answer. Any investment approach needs to fit the personal style of the investor using it. For example, if you have perfectionist tendencies and time on your hands, you will want to follow a different path to someone with a short attention span and other things to do. However, there are some reference points that are relevant to all investors.

Firstly, returns. How much value can be delivered by charting? Many people have a strong view that it adds either: a) zero value, or b) quite a lot of value, but based on academic research, the correct answer is probably: c) neither (depending on exactly what we mean by charting).

A role for momentum and reversal

Over the years, charting has generally not enjoyed a high level of credibility in academic circles, but a seminal piece of work was published in August 2000 by Andrew Lo, Harry Mamaysky and Jiang Wang at MIT. Using sophisticated techniques, these researchers examined the merits of a wide range of shapes and patterns, and they found a few surprises.

Their work confirmed the widely-held view that traditional charting concepts like support and resistance do not have practical value. However, they showed that two technical indicators – momentum and reversal – do have value. Put simply, they (as well as other researchers) confirmed that stocks that have performed well in the recent past (typically up to 12 months) tend to perform well in the future, whereas stocks that have performed well over longer periods of time (3-5 years) tend to underperform in future. These so called ‘anomalies’ are now widely accepted as real, and it is possible to construct profitable trading strategies that exploit them.

On this basis, there is value in technical analysis. However, that value is somewhat limited. Different studies show different results, but as a general observation, after allowing for trading costs and risk it is not entirely clear that reversal strategies work in the real world, and there have been extended periods when momentum strategies haven’t worked, notably around the time of the GFC.

While esoteric concepts like ‘head and shoulders’ patterns are unlikely to help much in the real world, there probably is merit in the old adage ‘the trend is your friend’, and having a disciplined approach to trend-following appears to be a simple and legitimate way to generate returns that beat the market by a noticeable margin. However, the upside is less than compelling, and there is another saying about rich chartists being a very rare breed.

While it is easy to draw up a long list of spectacularly successful and wealthy fundamental investors, coming up with a list of comparable technical analysts would be rather more challenging. Accordingly, if your aspirations for investment success lie beyond ‘a noticeable margin’ then you may be better off putting in the hard yards of fundamental analysis, or find a good manager to do it for you.

 

Roger Montgomery is the Founder and Chief Investment Officer at The Montgomery Fund, and author of the bestseller ‘Value.able

 


 

Leave a Comment:

RELATED ARTICLES

Cheap stocks: how to find them and how to buy them

Technical analysis using four trading tools

A Christmas fireside chat

banner

Most viewed in recent weeks

Raising the GST to 15%

Treasurer Jim Chalmers aims to tackle tax reform but faces challenges. Previous reviews struggled due to political sensitivities, highlighting the need for comprehensive and politically feasible change.

7 examples of how the new super tax will be calculated

You've no doubt heard about Division 296. These case studies show what people at various levels above the $3 million threshold might need to pay the ATO, with examples ranging from under $500 to more than $35,000.

The revolt against Baby Boomer wealth

The $3m super tax could be put down to the Government needing money and the wealthy being easy targets. It’s deeper than that though and this looks at the factors behind the policy and why more taxes on the wealthy are coming.

Are franking credits hurting Australia’s economy?

Business investment and per capita GDP have languished over the past decade and the Labor Government is conducting inquiries to find out why. Franking credits should be part of the debate about our stalling economy.

Here's what should replace the $3 million super tax

With Div. 296 looming, is there a smarter way to tax superannuation? This proposes a fairer, income-linked alternative that respects compounding, ensures predictability, and avoids taxing unrealised capital gains. 

The rubbery numbers behind super tax concessions

In selling the super tax, Labor has repeated Treasury claims of there being $50 billion in super tax concessions annually, mostly flowing to high-income earners. This figure is vastly overstated.

Latest Updates

Investment strategies

Trump's US dollar assault is fuelling CBA's rise

Australian-based investors have been perplexed by the steep rise in CBA's share price But it's becoming clear that US funds are buying into our largest bank as a hedge against potential QE and further falls in the US dollar.

Investment strategies

With markets near record highs, here's what you should do with your portfolio

Markets have weathered geopolitical turmoil, hitting near record highs. Investors face tough decisions on valuations, asset concentration, and strategic portfolio rebalancing for risk control and future returns.

Property

Soaring house prices may be locking people into marriages

Soaring house prices are deepening Australia's cost of living crisis - and possibly distorting marriage decisions. New research links unexpected price changes to whether couples separate or silently struggle together.

Investment strategies

Google is facing 'the innovator's dilemma'

Artificial intelligence is forcing Google to rethink search - and its future. As usage shifts and rivals close in, will it adapt in time, or become a cautionary tale of disrupted disruptors?

Investment strategies

Study supports what many suspected about passive investing

The surge in passive investing doesn’t just mirror the market—it shapes it, often amplifying the rise of the largest firms and creating new risks and opportunities. For investors, understanding these effects is essential.

Property

Should we dump stamp duties for land taxes?

Economists have long flagged the idea of swapping property taxes for land taxes for fairness and equity reasons. This looks at why what seems fairer may not deliver the outcomes that we expect.

Investing

Being human means being a bad investor

Many of the behaviours that have made humans such a successful species also make it difficult for us to be good, long-term investors. The key to better decision making is to understand what makes us human and adapt.

Sponsors

Alliances

© 2025 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.