More Important To Be Profitable Than Right

There are no egos in the marketplace. No holding positions until you're right. The key is making the timely adjustments. Being able to adapt when necessary. Vanessa Drucker has a nice piece out this morning on FundWeb and brings a few technicians into the conversation:

“Topsy-turvy prices represent the enormous uncertainty,” says Louise Yamada, the founder of Louise Yamada Technical Research Advisors. Just as economic narratives may not be immediately reflected in market prices, sometimes the fundamental characteristics of companies and their share prices also part ways. Yamada points to the market tops in 2000 and the high price investors paid for companies as a multiple of their earnings. “Price-to-earnings ratios might seem reasonable, but the question is, what are people willing to pay for them?”

While fundamental analysis examines price/earnings (P/E) ratios, and related metrics, technical disciplines largely focus on price and volume. Traders say, “price is true,” in a reminder that it is more important to be profitable than to be right. Your analysis can be spot on, but if the market is against you, you are losing money.

“Technical analysis puts that in your face,” says David Solin, who manages technical analysis at FX Analytics in Essex, Connecticut. During recent volatility, markets have careened almost 10% a week. Portfolio managers would be thrilled with 10% moves in rapid time-frames, but fundamental analysis could not capture ways of exploiting such shifts.

Price may be true, yet skilled technicians can sometimes even see beyond price with their toolkits. In November 2009, Goldman Sachs shares were trading at $170. John Roque, the managing director at WJB Capital Group, warned sceptical clients that the financial powerhouse could sink as low as $100, according to technical clues. Those signals were not apparent from the price action alone. “Meanwhile, analysts kept trumpeting that the financial sector was cheap,” Roque recalls. Using his own indicators, such as the downward slopes of moving averages, for Goldman and other financials, Roque foresaw deterioration. Indeed, the mighty Goldman slipped below $100 this September.

Analysing companies’ fundamental characteristics, rather than patterns in their share price movements, takes time and hard work. Analysts toil to gather all the data, study a company’s history, and pay site visits. “But a chart takes two minutes,” Solin points out. And if you specify parameters, “you can buzz through thousands of charts across markets.”

Go read the article in full, including a discussion on the value of P/E ratios on FundWeb