Along with the question of what the “best” investment is, one of the most common queries we get is what is the “best strategy” to use in the stock market. Fundamental Analysis? Technical Analysis? Peso-cost averaging? Tsupita?An amalgam of those?
Well, just like there is no “best” investment that will work for everyone, there is also no “best” strategy that will work all the time for all the people. Why do I say that? Well let’s take a quick look at the more popular approaches:
In its simplest form, Fundamental Analysis or FA, consists of poring through a company’s financials and buying firms that the market has undervalued while avoiding those that have been overvalued. This is the foundation of Buffet’s success and many point to him as validation of this strategy.
However, what we have to understand is that this approach is dependent on one thing – access to accurate and timely information. Without that, the effectivity of FA is greatly diminished. Add to that the fact that serious FA practitioners make their own calculations. They do not rely on the numbers made by other analysts and take it as gospel truth. They crunch the numbers themselves and unless you have an affinity for that, then FA will prove to be a very frustrating endeavor.
On the other end of the scale is Technical Analysis or TA. Whereas FA examines the company’s financials to determine its value, TA assumes that said information is already reflected in the company’s current price. This is one reason TA is very popular – it takes out the need to have access to a firm’s financials.
The main knock against TA though is its steep learning curve. Simply put, there are MANY different philosophies and approaches when it comes to TA and more are being developed as the years pass. There are chart formations, Elliot Waves, IchiMoku, Momentum indicators, Candlesticks, Gann boxes and many more. This means that someone who would like to do TA will first have to determine which “school” to attend and spend months, if not years, learning that approach. And since there are very few formal trainings for these things in the Philippines, this means that the education will be conducted in a very hodge-podge manner.
PESO-COST AVERAGING (PCA)
PCA is another popular approach which takes the fundamentals of a good company and tries to minimize the need for TA by simply investing repeatedly over time. The attraction is in its simplicity as theoretically anyone can do this.
Within its strength though is also its biggest weakness. To do PCA effectively means that a person has to have the TIME to actually do it. And I don’t just mean the time to make the investments on a regular basis – but rather the time to actually let the business (and hopefully the stock price) appreciate. Hence, for people who have very short investing windows, PCA will not be a very good idea.
DAY TRADING (TSUPITA)
Lastly, there is day-trading or buying and selling positions within relatively short spans of time. Whereas PCA relies more on FA, day-trading pins its strength on TA and the discipline to make quick entries and exits. The allure is the ability to make large amounts of money within those short periods – provided that losses are trimmed quickly and decisively.
The drawback though is that a person has to have a significant amount of time AND money to do this effectively. This is NOT for the faint of heart as fortunes can be made or lost in the span of a few hours every day. Hence, if a person has a full-time job or business, then day-trading is definitely a no-no.
So how does one choose then? Well, in much the same way as we teach people to choose the proper investment for themselves: through A.I.D.
How much time, money and knowledge do you have to watch the market? Answer that and you can begin to choose for yourself, which strategy will work best for you. As always, YOU should make the decision.