By Michael Tarsala, CMT
Like religion and politics, there’s dogma in investing. And it is repeated, and sometimes generated, by money managers.
One of the places this dogma may appear is in a manager’s bottom-up, fundamental view of the investing world.
I have studied both fundamentals and technical analysis for years. And I wonder why more managers are not omnivores of information, taking cues from both disciplines.
“Unquestionably, there’s value in both approaches,” says Bill DeShurko of 401 Advisor, a Covestor manager and one of the few I know who highly values each of them.
“You can’t tell me that timing doesn’t matter,” he says. “Even if I buy something under the assumption I am going to buy and hold it nearly forever, I still look at technicals to time the purchase point, as well as the exit.”
The bottom-up approach:
The vast majority of managers take a fundamental, bottom-up view of the investing world. They primarily analyze the health and trends of an individual company, and use that bottom-up analysis when forming their sector and macro views.
Some do so to the point where they eschew any technical indicators.
Where this can fall short, though, is when the bottom-up approach finds otherwise great stocks at the wrong point in time. Or when an adviser stubbornly ignores market sentiment, trends, risk-reward and seasonality that make it tough for their stock picks to succeed in the intermediate term.
The top-down approach:
Some money managers — not many — do the opposite. They start with a top-down view based on the charts. They first look at the price and volume of the overall stock market and perhaps other asset classes like bonds, gold and oil. Then they look at the charts of individual sectors and industry group. Finally, they look at the charts of individual stocks.
If they are purists about it, they base almost all their decisions on price, volume and derivatives of the two. And they eschew the fundamentals.
There’s a shortfall in this approach, too. Top-down thinking rarely leads to the diamond-in-the-rough value stocks that are doing things very differently from the other stocks in their sector.
Perhaps to his credit, DeShurko is no purist. For his Dividend and Income Plus model, he incorporates bottom-up work for his dividend stock buys and sells, with help from technicals to get the timing right. Yet he also incorporates the technical discipline of seasonality into his model. And he relies on technicals exclusively when he enters and exits the high-yield market, a riskier asset class that he believes takes its cues from the charts.
I say hooray for the non-purist, who ignores dogma and simply tries to take the best from both worlds.
