The 12 differences between value investing and technical analysis

El value investing and technical analysis are the two most popular investment methods out there today. As we have already seen, value investing is not compatible with technical analysis, so we must opt ​​for one style or another and decide if we want to be investors or traders when interacting with the markets. I do not have to tell you that for many reasons I am a supporter of value investing, but that is a topic that I leave for future articles. In this article we will see the 12 differences between value investing (also called fundamental analysis, although I prefer another terminology) and technical analysis in terms of their underlying philosophy, technique, key factors, information effect, tools, time horizon, skills necessary, key personal characteristics, main figures, major dangers and special abilities.

This article is based (albeit with modifications) on the introduction of a The 12 differences between value investing (fundamental analysis) and technical analysis

In case there is a problem when loading the infographic, I also leave you the differences between technical analysis and value investing in text, since prevention is better than cure. 😉

Underlying philosophy

  • Technical Analysis: The price is the main data on which you have to base yourself. Nobody knows what the value of an asset is and its estimation is of little use.
  • Value Investing: Each asset has a fair value, called intrinsic value. You can estimate that value (although there may be a margin of error) and the price will end up converging with its intrinsic value.

In qué consists

  • Technical Analysis: In guessing in which direction the price of an asset will move and following the movement. To win, you have to guess which direction it will move and exit before it changes direction.
  • Value Investing: Calculate the value of an asset and buy it if it is undervalued or sell it if it is overvalued. To win you have to get the value calculation right and wait for the market price to converge with the value.

Key factors

  • Technical Analysis: Price is determined by supply and demand, which are affected by market sentiment and trend.
  • Value Investing: Value is determined by cash flows, growth, and risk.

Information effect

  • Technical Analysis: New information (news, stories, rumors ...) that affects sentiment will move the price, even if it has no consequences on its value.
  • Value Investing: Only information that alters cash flows, growth or risk can affect value.

Tools

  • Technical Analysis: Technical indicators, price charts, investor psychology.
  • Value Investing: Relative valuation, cash flow discount, real options.

Time horizon

  • Technical Analysis: From very short term (minutes) to months or years.
  • Value Investing: Long term (years).

Skills needed

  • Technical Analysis: Ability to calibrate changes in the trend before the rest of the market.
  • Value Investing: Ability to value assets despite uncertainty.

Key personal characteristics

  • Technical Analysis: Act fast, player instincts.
  • Value Investing: Critical thinking, patience, coldness.

Greater dangers

  • Technical Analysis: Unexpected trend changes.
  • Value Investing: That the price does not end up converging with the value.

Main figures

  • Análisis Técnico: Charles Dow, Ralph Nelson Elliott.
  • Value Investing: Benjamin Graham, Warren Buffett.

Special capabilities

  • Technical Analysis: Ability to move the market (with a lot of money and many followers).
  • Value Investing: Ser un catalyst for the price to move towards its value.