Value investing and technical analysis are two of the most used methods to invest in the stock market. Some investors consider it a good idea to reconcile the two styles and have an investment system that combines the ideas of both. However, in this article I will explain the reasons why value investing is not compatible with technical analysis.
The defense of compatibility between value investing and technical analysis
More than once I have read on blogs and forums that technical analysis should be used as a complement to fundamental analysis for the investment process. The most widely used argument in defense of the compatibility between the two is that fundamental analysis should be used to determine "which companies to buy" while technical analysis is used to determine "when to buy and sell."
However, value investing does not need external reasons to determine when to buy and when to sell. A company is bought if it trades at a price lower than its intrinsic value (always with a safety margin prudent) and sells if it trades at a higher price. Therefore, this argument is not valid to determine the need to reconcile both investment styles.
Who defends the compatibility of technical analysis and value investing?
Most of the articles and comments that I have read advocating the compatibility between technical analysis and fundamental analysis come from fundamentally technical analysts. I have never seen any value investor advocating the use of technical analysis in the investment process. When I speak of a value investor, I am referring to investors who do a thorough fundamental analysis of the company, not someone who looks at only 3 or 4 ratios. It is possible that there is someone who defends it, but at the moment I have not seen any cases.
In my opinion, the defense of the compatibility between both styles of investment originates from a business interest on the part of technical analysts who defend it to sell their products, be it courses, books or financial advice so as not to lose part of their clientele potential. It is something similar to what happens with the neo-healers who defend the compatibility of homeopathy with traditional medicine.
The incompatibility of value investing with following stock market "trends"
In value investing, in many cases shares of companies whose prices are falling continuously are bought. In technical analysis, this is what is called a "downtrend." Buying companies in a downtrend would contradict one of the basic principles of technical analysis of not investing against the trend or "never picking up a knife when it falls."
Similarly, a value investor normally sells their shares in an “uptrend”, which is usually when the price exceeds the intrinsic value of the stock, while followers of technical analysis invest in favor of the market trend and buy shares that are rising in price. Warren Buffett was categorical on this issue, saying that:
"The most absurd reason in the world to buy a stock is that it is going up."
The incompatibility of the use of "stop loss" in value investing
A "stop loss" is an automatic purchase order made to a broker to sell shares if they fall below a certain price. It is one of the basic resources of technical analysis to reduce risk and cut losses.
On the other hand, value investing NEVER uses "stop loss". If we buy and the price falls, what a value investor does is not sell, but buy more since the shares will have a more attractive price. The only exception would be in the event that the value of a company deteriorates and loses value, although this is only an exception and not the general rule.
The scarcity of buying opportunities
The fundamental analysis of a company is complex and time consuming. It is not only necessary to analyze the annual accounts of the company, but also its sector, strategy and competitive advantages. Furthermore, monitoring must be continuous. If it is already difficult to find attractive securities based solely on fundamental factors, including technical factors would further complicate investment selection and result in the loss of a large number of investment opportunities.
The best value investors dismiss technical analysis
I don't know if there are any exceptions, but the vast majority of the best value investors in the world do not reconcile value investing with technical analysis. Some have even taken a direct position against it, such as Peter Lynch, who criticizes this investment style in his book "One up on Wall Street", arguing that his technical analysis advisor had made him lose many buying opportunities by losing a lot of money to Your clients.
Surely there are more reasons to explain the incompatibility between value investing and technical analysis. It is also possible that there are other arguments in your favor. I await your comments, both for and against the compatibility between both investment styles.