What is more important for profitable investing - technicals or fundamentals

In the world of investing, two primary approaches help investors analyze markets and securities:?fundamental analysis?and?technical analysis. But what is more important for profitable investing – technical or fundamental analysis? We share our insights.

There are two main approaches to analyze potential investments

Fundamental Analysis:

• Focus: Fundamental analysis evaluates the?intrinsic value?of a security or an entire market sector. It aims to understand the real worth of an asset.
• Tools Used: Financial Statements: These include income statements, balance sheets, and cash flow statements. Analysts use them to assess a company’s profitability, liquidity, and solvency. Economic Indicators: Macroeconomic indicators (e.g., GDP growth, inflation, unemployment rates) help understand the economic environment. Interest Rates: Central bank rates significantly impact investment values. News and Events: Company news, earnings reports, and regulatory changes affect stock prices. Qualitative Information: Factors like management quality, industry cycles, and competitive advantages.
• Long-Term Focus: Fundamental analysis is generally for long-term investors who seek to calculate a company’s future earnings against its present net value.

Technical Analysis:

• Focus: Technical analysis evaluates financial assets (stocks, currencies, commodities) by reviewing historical price and volume data.
• Tools Used: Price Charts: Technical analysis looks at statistical trends in a stock’s price and volume over time. Moving Averages: These help identify trends and potential entry/exit points. Chart Patterns: Recognizing patterns (e.g., head and shoulders, double tops/bottoms) guides decision-making.Volume Analysis: Examining trading volume alongside price movements.
• Short-Term Perspective: Technical analysis assumes that efficient market theory holds in the long run but seeks to exploit short-term inefficiencies.

In Summary:

• Fundamental analysis?focuses on the quality of an asset, considering financial health, management, and industry context.
• Technical analysis?relies on historical price data and patterns to predict short-term price movements.

Many investors blend both approaches for a more comprehensive view.?Ultimately, the choice between fundamentals and technicals depends on your investment horizon, risk tolerance, and personal preferences.

Fund managers?rely on a combination of?key performance indicators (KPIs)?and analytical tools to make informed investment decisions. Below we summarize some of the essential indicators and tools they use:

Asset Under Management (AUM) Growth:

• AUM measures the total amount of money a fund manages. Fund managers closely monitor AUM growth to assess their business’s health and success.

Information Ratio:

• This ratio evaluates a fund’s ability to generate excess returns relative to a benchmark index while considering risk. A higher information ratio indicates better performance.

Return on Investment (ROI):

• ROI measures the profitability of an investment. Fund managers analyze historical returns to gauge the effectiveness of their strategies.

Risk-Adjusted Returns:

• These consider risk alongside returns. Metrics like the Sharpe ratio help assess whether a fund’s returns adequately compensate for the risk taken.

Portfolio Diversification:

• Fund managers aim to create diversified portfolios to manage risk. They track the allocation of assets across different sectors, geographies, and asset classes.

Expense Ratio:

• The expense ratio reflects the cost of managing the fund. Lower expense ratios are generally favorable for investors.

Active Share:

• Active share measures how different a fund’s holdings are from its benchmark index. High active share suggests active management.

Alpha and Beta:

• Alpha represents the excess return generated by a fund manager beyond what the market provides. Beta measures a fund’s sensitivity to market movements.

Additionally, fund managers use?operational value creation strategies?to enhance returns. They focus on revenue growth, margin expansion, and operational efficiency within portfolio companies.?Monitoring key performance indicators (KPIs) directly linked to the fund’s investment thesis helps guide their decisions.

Equity traders rely on a variety of?technical indicators?to analyze price movements, identify trends, and make informed trading decisions. Below we summarize some of the key indicators commonly used by equity traders:

Relative Strength Index (RSI):

• The RSI helps gauge market momentum. It oscillates between 0 and 100, indicating overbought or oversold conditions.?Traders use it to identify potential trend reversals.

Bollinger Bands:

• Bollinger Bands measure the “highness” or “lowness” of price relative to previous trades. They consist of an upper band (standard deviation above the moving average) and a lower band (standard deviation below the moving average).?Breakouts from these bands can signal potential price movements.

Moving Averages (MA):

• MAs smooth out price data by calculating averages over a specific period. Common types include the simple moving average (SMA) and the exponential moving average (EMA).?MAs help identify trends and potential entry/exit points.

MACD (Moving Average Convergence Divergence):

• MACD combines short-term and long-term moving averages. It provides insights into trend strength and potential crossovers.?Traders look for bullish or bearish signals based on MACD line and signal line interactions.

Stochastic Oscillator:

• The stochastic oscillator measures the closing price relative to a price range over a specific period.?It helps identify overbought or oversold conditions and potential trend reversals.

Average True Range (ATR):

• ATR shows the degree of price volatility.?Traders use it to assess potential risk and set stop-loss levels.

Volume Analysis:

• Monitoring trading volume provides insights into market participation.?High volume during price movements can confirm trends or signal reversals.

Traders often combine multiple indicators to create a comprehensive trading strategy.?Each indicator has its strengths and limitations, so understanding their nuances is crucial for successful equity trading.

Technical indicators which proved to bring the most accurate results

The accuracy of technical indicators can vary based on factors such as market conditions, time frames, and trading strategies. However, several widely used indicators have demonstrated effectiveness. From historical analysis of returns it is very difficult to say with confidence which technical indicator is the most accurate. In our view, investor should combine several indicators. The most common of them are:

On-Balance Volume (OBV): Application: Traders use OBV to identify potential trend reversals based on volume changes.

Relative Strength Index (RSI): Application: Traders look for RSI levels above 70 (overbought) or below 30 (oversold) to make decisions.

Moving Average Convergence Divergence (MACD): Application: Bullish or bearish signals occur when these lines cross.

Stochastic Oscillator: Application: Traders watch for crossovers and extreme levels (above 80 or below 20).

Williams Percent Range (Williams %R): Application: Values below -80 indicate oversold conditions, while values above -20 indicate overbought conditions.

Investing with Artificial Intelligence

Artificial intelligence (AI)?has significantly impacted the world of investing, offering both advantages and opportunities. Currently there are several application of AI in investing:

Stock Picking with AI:

• AI algorithms can efficiently analyze vast amounts of data to identify stocks that meet specific criteria.?Stock screeners allow investors to filter stocks based on fundamental and technical data points like accounting ratios, market capitalization, trading volume, and moving averages.
• By leveraging AI, investors can make more informed decisions about which stocks to buy or sell.

Automated Portfolio Building:

• Robo-advisors like?Wealthfront?and?Betterment?use AI to automate the process of creating investment portfolios. These platforms guide users through a questionnaire to determine their investing goals, time horizons, and risk tolerances.
• Based on the user’s responses, robo-advisors construct a model portfolio that aligns with the investor’s needs and preferences.

Our view

There are number of strategies that you can apply in order to make profitable investments. However, there is no one particular strategy that would bring 100% accurate results. It is also advisable not to rely completely on AI algorithms. The best approach is to use a mix of strategies and tools which are suitable for your risk-return target. Continuous learning and communication with industry experts is critical in order to achieve the best investment results.

In this way ki-wealth.com is here for you to help. For more detailed information please do not hesitate to contact us.