The Rebel Alliance vs. the Galactic Empire, Less Filling vs. Tastes Great, Batman vs. Superman, Cain vs. Abel, and Seinfeld vs. Newman.
These are among the greatest matchups in history. Allow me to add one more to the mix:
Fundamental Analysis vs. Technical Analysis
I know this matchup may not be as exciting as the ones listed above, but it is fascinating. At least to me. And really, it's all about me.
Both methods can be used to analyze financial markets and investors have been debating the pros and cons of each for decades. Before I tell you which method I prefer, let's explore each in turn...using references from Star Trek.
Fundamental Analysis: The Method for Logical Vulcans
If this was the Star Trek universe, investors using fundamental analysis would be from the planet Vulcan. For the uninitiated, this means investors who use logic and reason with zero emotion to analyze financial markets and companies. Here are examples of some metrics used:
- Macro and microeconomics
- Growth rates
- Risk levels
- Earnings per share (EPS)
- Price to earnings (P/E) ratio
- Dividends paid
In other words, fundamental analysis involves using quantifiable metrics to better understand financial markets and companies.
Technical Analysis: The Method for Irrational Humans
If fundamental analysis is the method of choice for cold, emotionless Vulcans, then technical analysis is perfect for irrational humans. Investors who use technical analysis are often known as "chartists" because they use charts to determine when to buy and sell in financial markets. Specifically, chartists make use of past trading activity and price to determine future prices in financial markets and companies.
Which Method Do I Prefer?
It may be obvious by my choice of wording, logical versus irrational, that I favor fundamental analysis. I'm sure I drive my wife crazy with my logical, rational take on life and investing. Still, we make a good team. Yin and yang. But I digress.
The following quote, which you may have heard at one time or another, sums up my rationale for choosing fundamental over technical analysis:
Past performance does not necessarily predict future results.
I cannot fathom why anyone would base investment decisions on past trading activity and price.
But Wait, There's More!
First, I have an intern. His name is Zach Snyder* and he's studying econ at my alma mater, the University of Maryland at College Park. Fear the turtle! Zach is seriously considering a career as a financial planner, so he'll be working with me over the next several months.
Second, Zach will be writing posts for my blog, www.frugalplanner.com. His first post, titled "Gen Y Got Off to a Bad Start, but it's Not Too Late to Get Back on Track" was published this week. Please take a few minutes and check it out.
*Thankfully, Zach is not the Zach Snyder responsible for directing Man of Steel or Batman vs Superman: Dawn of Justice.
Listening / Reading / Watching
Here's what's got my attention this week:
- Algorithms to Live By: The Computer Science of Human Decisions by Brian Christian and Tom Griffiths. Have you ever wanted to apply computer algorithms to everyday life? Who hasn't??
- Dark Matter by Blake Crouch. I'm a sucker for sci-fi stories about alternate realities. So far, this is one of the better ones I've read in a while.