Stock Fundamentals, the Macro, Technicals and Emotions

The life of an investor is not an easy one. Even more so, when investing somebody else’s money, as there is a fiduciary duty to do one’s best for the client. Figuring out what to buy or sell, to generate consistent absolute or relative performance requires immense skill and perseverance.

While the best investment managers will often use very different approaches and techniques to drive their performance, they will all be guided by similar principles.

Typically they will have a better understanding of the fundamentals and the macro than anybody else. Furthermore, they use technical analysis to their advantage, minimising any emotional biases. They will also utilise a clearly defined process.

Looking back at my own career, I am very grateful for having two very different experiences – that of starting my investment career at JP Morgan Investment Management, where I was trained on the importance of fundamental analysis and valuation. Later on, I spent time at Investcorp, a Fund of Hedge Funds, where I was part of the management team. The training and knowledge I garnered in each of these roles has shaped who I am today, as an investor and fiduciary.

As an analyst, JPMIM taught me the importance of understanding the numbers, the P&L and Balance sheet, in making any valuation and investment decision. Later, working on the fund of hedge funds side, was equally important in building my understanding of how to develop a macro view and utilise technical analysis.

Unlike index tracking mutual funds, hedge funds are more aggressive in terms of position sizing and their Gross and net exposures, with the better managers aggressively cutting losing positions and adding to winners. Many mutual fund managers, focussed only on fundamentals, may struggle with the concept of cutting a losing position, as a lower price often equates to a better valuation in their models.

It was the above experiences that helped me successfully manage my personal account through the global recession of 2008. Those that were able to identify an overvalued US housing market (macro outlook), determine which sectors and companies were most at risk when the market turned (fundamental analysis) and time it correctly (technical analysis), were able to protect capital, if not profit from the downturn.

Being nimble and utilising a mix of macro, fundamental and technical analysis is critical to successfully managing through periods of market turmoil.

So why does this all matter?

We are at a very interesting time in history. The status quo is being rocked with Trump and Brexit. The populus is become restless. Financial assets are generally expensive, with US stocks close to all time high valuations and bond yields still close to record lows.

And we have central banks all over the world that are petrified of deflation and are ardent admirers of Keynesian policies, even though their understanding of his views is somewhat flawed.

This is a time, when using fundamental, macro and technical analysis could be vitally important for your financial, and probably also physical, health.

Most retail investors don’t have a clearly defined investment strategy that utilises these three disciplines, with the result that they are often unable to protect their capital in turbulent markets. Not only that, but many retail investors have emotional and personal biases which are the number one cause of underperformance.

Greed, fear or ego are often behind our emotional state and it is these emotions that often lead to making, in hindsight, stupid decisions.

With financial markets where they are today, I advocate that investors recap their trading rules to ensure they are not over exposed to risk assets and have a clear plan in place to capture any further upside in the market, with an appropriate amount of net exposure, while having the tools in place to determine when to exit and head for the hills.

If we can help with defining such tools around your needs, just reach out to us.