Dear DTA,
Hi. Great articles. Just wondering about technical analysis. I don’t see a lot of technical stuff here. Any thoughts on it? Is it helpful? Something I should look at or avoid?
-Jorge D.
Hi, Jorge.
Thanks for writing in.
We appreciate the kind words about the content. Glad to know you’re enjoying the quality and actionable subject matter we provide.
You have an interesting question.
Now, I’m sure you’ll get different answers from different people.
My perspective comes from almost a decade of successful investing.
I also look to what highly successful investors out there advocate and have personally done in order to build their wealth.
Well, these well-regarded investors often have nothing good to say about technical analysis.
In fact, they’re often downright critical.
Technical analysis is widely considered to be analogous to trying to read tea leaves.
Technical analysis is studying charts and then trying to identify profitable trading trends and opportunities.
The funny thing is, every “chartist” I’ve ever seen is using yesterday’s information to reinforce their confirmation bias.
Charts prove prior results.
It’s almost like predicting yesterday’s weather.
Extremely accurate. But totally worthless.
When a trade works, they’ll point to the charts.
If a trade doesn’t work, it’ll be some other issue.
Warren Buffett summed up technical analysis with a joke he told an audience at Vanderbilt University in 2005:
“I realized that technical analysis didn’t work when I turned the chart upside down and didn’t get a different answer.”
So if technical analysis isn’t the answer, what is the right kind of analysis?
The answer, in my experience, is fundamental analysis.
Fundamental analysis is examining financial statements and coming to some kind of long-term investment conclusion about a business based on real-world operating results.
This isn’t reading tea leaves.
I’m talking about looking at stocks for what they really are: slivers of ownership in real businesses.
These are real businesses selling real products and/or real services.
Those real products and/or real services lead to real revenue and real profit.
And I can tell you firsthand how real that profit is.
I collect tangible proof of profit from every business I’m invested in.
That tangible proof comes in the form of growing dividends.
Take a look at my FIRE Fund.
That’s my real-money early retirement stock portfolio.
I built that in only a few short years of my life, all on a middle-class income.
I lived well below my means and intelligently invested my capital into high-quality businesses (proven out by fundamentals) that pay growing dividends.
And I went from below broke at 27 years old to financially free at 33 by doing that.
I now live off of the five-figure dividend income my FIRE Fund generates.
And I describe all of that, in step-by-step detail, in my Early Retirement Blueprint.
Charts tell you what happened.
Fundamentals give you insight into what will likely happen in the future.
Stock prices are, over the long run, propelled by the underlying earnings of a business.
It’s all about money.
There’s profit. And there’s profit the market thinks a business can produce in the future.
Then there’s a multiple on that profit.
Now, I’ll be honest with you.
Stock prices can be affected by news and sentiment over the short term.
Emotion has a lot to say about today, this week, or even this month.
But fundamentals drive the long-term success of a business and its stock.
By the way, it’s not just fundamentals.
I’m saying it’s about strong fundamentals.
It’s just like anything else in life.
You want quality.
It’s like choosing between a jalopy and a Ferrari.
Choose between a castle and a trailer.
There’s high quality. Then there’s inferior quality.
When it comes to investing your long-term capital, Jorge, you want to bet on the castles.
More specifically, you want to bet on the castles with wide moats to defend themselves against the marauding hordes (competition).
This is one reason why I’m a dividend growth investor.
And it’s why I invest in select companies from the Dividend Champions, Contenders, and Challengers list.
That list contains invaluable data on more than 800 US-listed stocks that have raised dividends for at least the last five consecutive years.
A lengthy track record of growing cash dividends is a pretty good initial litmus test of fundamental quality.
You need to build on that initial litmus test with a full analysis of all financials in order to prove out the level of quality.
Of course, you want that quality at a good valuation.
Valuation plays a critical role in the performance of your investment.
This is why I personally highlight what appears to be an undervalued high-quality dividend growth stock every Sunday.
These ideas are freely shared via the Undervalued Dividend Growth Stock of the Week series.
Now that I’ve got that out of the way, it’s time to better understand fundamental analysis.
Fellow contributor Dave Van Knapp put together a fantastic series of articles on this.
They’re his Dividend Growth Investing Lessons.
This series is admittedly geared toward teaching the dividend growth investing strategy specifically.
But it does discuss fundamental analysis with depth.
This analysis can apply to just about any investment method you might use.
I believe this series will greatly help you become a more informed investor, regardless of how you go about it.
Look, Jorge.
If you still want to go crazy with the charts, after reading this, have at it.
It’s your money.
But if you want to become a successful and wealthy investor over the long run, I think it makes a lot more sense to focus on fundamental analysis.
No matter how you go about it, keep a few things in mind.
Live below your means.
Save your money.
Intelligently invest that money.
And let compounding grow your wealth for you.
Most importantly, start doing all of that today.
I wish you luck and success.
Jason Fieber
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