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I have read a few articles about value investing, and a few biographies of value investors. I am under the impression that value investing does not involve chart reading or technical analysis at all. In fact, value investors don't seem to be concerned about downward chart trends. Is my understanding of the situation correct? Why do value investors ignore technical analysis?

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Why do value investors ignore technical analysis?

Technical analysis tries to predict future behavior from past behavior purely by looking at prices (and possibly other stats like volume traded). Fundamental analysis looks at the present fundamental financial attributes of a company (and possibly the recent past of those fundamentals) to predict future fundamentals. It is not concerned with what the stock price was, they are guessing what it should be and whether to buy it based on where it is now. For "value" investors, this means specifically if the price is significantly below what it should be.

To be fair, they may be concerned about things downward trends, but not from a graphical standpoint - they would want to know why there was a downward trend. Is it something that the company has corrected? Or can they correct it with new management (which was a large part of Warren Buffett's strategy)?

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  • So value investing tries to predict future behavior by making assumptions? – Victor May 23 at 3:09
  • @Victor in a way, yes. They predict future cash flows (to get present value) by looking at the fundamentals of a company. If the current price is lower than the estimated value based on those predictions,then it may be a good "value". – D Stanley May 24 at 15:16
  • So, in a way, it is no different from Technical Analysis. I mean how many times are valuations even correct? I would say hardly ever!!! – Victor May 25 at 0:40
  • Well no one knows the future for certain, but it's a vary tenuous comparison. I'd argue that future cash flows are far less uncertain than guessing the price based purely on visual clues from charts. – D Stanley May 26 at 12:42
  • Really, so the cashflows that companies are experiencing now (zero) were foreseen by value investors a year ago or even 6 months ago, was it? I think your bias is getting in the way of reality. Basically, people just use a method they have learned and are comfortable with, something that helps them sleep at night because they feel they know more than the next guy. No matter what method you use to analyse and make your trading decisions unless you are using risk management you are doomed to fail - because in the end it is all a big guess! – Victor May 28 at 1:54
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Technical analysis is largely based on short-term trades (less than a year). Signals in charts are indicative of market opportunities, and the underlying price or corporate fundamentals are less important. When a value investor is investing, they look deeply through financials and corporate guidance, executive team, and strategy in order to determine whether a company is trading below it's 'potential' value and buy based on the hope the market will recognize this previously unseen value.

Buying based on technical analysis is essentially trying to 'time' the market, whereas value investors are usually of the opinion that you shouldn't try to time the market and that value is value.

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  • Not true, I have seen many people use technical analysis to place trades that last for many years, myself included. So "value investors are usually of the opinion that you shouldn't try to time the market and that value is value" because they "hope the market will recognize this previously unseen value" which is based on assumptions??? – Victor May 25 at 0:54
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Technical analysis is based on old experience and statistical trends. I personally don't believe 100% in technical analysis because it's somewhat similar to fortune telling. You see a certain trend and so you must buy, hold, or sell. It's not much different from saying you must be a certain kind of person because you are Capricorn.

I believe many value investing would pay attention to downward chart trends, but the point is how they interpret the trends. Technical analysts may see the downward trend as signals for buying or selling depending on the pattern, but value investors would do their due diligence and find out whether the trend can be justified by "facts". The stock could have gone down because of poor earnings, mismanagement, bad industry outlook, fake news, irrational herding... and so on and on. Technical analysis cannot tell you facts like those.

Value investors evaluate fundamentals, and make decisions based on their outlook on the target asset.

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  • How can value investing and fundamental analysis be based on facts, when it is based on assumptions made by the person making the valuation??? The only facts are the current and past prices! – Victor May 25 at 0:44
  • Valuation is only part of fundamental analysis. Also, while valuation needs assumptions, you cannot make assumptions without understanding past performance, current competitive landscape, market scale, and so forth. – LeonC May 25 at 3:52
  • "you cannot make assumptions without understanding past performance" - WOW - but you called the same thing in Technical Analysis as fortune telling? So you look at past performance, make assumptions, and then you can foretell what the current or future value should be - is that correct??? – Victor May 25 at 6:12
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My view:

Technical Analysis seems more about trying to guess the market's next moved by comparing the available market data for a company against historical trade data of many/all companies and hoping a pattern matches to help predict the future. "On sunny days, people in blue pants are generally happier, so given it's sunny today let's see if Mr. Market has blue pants on."

Value Investors analyse the companies current financial state and past record (not price) to calculate the value they believe the company to be worth. The number of factors, including each individual's risk appetite/margin of safety applied, available data, knowledge of the levers a company has available to pull to influence profits and the management team that can pull them, etc. all mean that different people will arrive at a different per share value for the same company (occasionally reviewing that "buy below" number at certain times/under certain conditions). Once a value has been determined, Value Investors simply wait for the price to go below that number before buying. "I know what I think the shares are worth, let's see how much Mr. Market willing to sell/buy at".

Edit...

Value investors each use a different margin or safety in their formulas, and may consider different points of data better in assessing value based on their personal risk appetite, thus the different values they arrive at. They don't assume the price will change in their favor, so they try to determine value. If they purchased below their assessed value and the company gets sold off, their share in the proceeds from the sale of the company is (ideally) worth the same/more than they paid for it. Dividends and share price increases along the way are a bonus and/or opportunities for profit.

Technical Analysis is trying to determine when and in which direction the price will change to find an entry/exit point with profit in between, and as a result I suspect those using purely technical analysis will trade more frequently which incurs more taxes and fees, or at least that's how it seems to me.

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  • They sound exactly the same! Both relying on hope, beliefs, assumptions. You even said it yourself - "different people will arrive at a different per share value for the same company" - sounds pretty worthless really! – Victor May 25 at 0:50
  • "They don't assume the price will change in their favor, so they try to determine value. If they purchased below their assessed value and the company gets sold off, their share in the proceeds from the sale of the company is (ideally) worth the same/more than they paid for it." - What does that actually mean? So they buy an investment but then don't assume that the price will change in their favor - so they are buying an investment in order to lose money? Or they don't care if they make or lose money? How do you know if a company gets sold off it will not fall below their purchase price? – Victor May 29 at 0:29
  • Because they've (reasonably) assessed the value of the company, with a margin of error, even if the company get's sold off to cover liabilities, the remaining funds distributed to shareholders should still be above their initial purchase price. They have limited their risk - prepare for the worst and hope for the best. – Dave F Jun 2 at 4:02
  • So they bought the company for next to nothing? How can someone (reasonably) assess the value of the company, with a margin of error, so that even if the company gets sold off to cover liabilities, the remaining funds distributed to shareholders should still be above their initial purchase price? For this to happen the company would have to be in very bad shape. So why would anyone doing any valuation on a company buy into that company as it is about to go into liquidation??? Nothing you have said makes any sense! – Victor Jun 2 at 7:28

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