At the Tactical Investor, we do not really subscribe to the core principles of fundamental analysis. We do, at times, take certain key aspects of fundamental data into consideration, but we never rely on this data alone. At the Tactical Investor, Fundamentals are always used in conjunction with Technical analysis and Mass Psychology. As a standalone tool, it is not something we choose to rely on.
The reason behind this thought process is two folded
- Firstly, we find that technical analysis (when using the right tools) when combined with Mass psychology is yield’s far superior results
- Secondly there is no inductive thinking involved.
Fundamental analysis mostly relies on deductive reasoning. In order to deduce something you have to examine certain data that is presented to you in a standard/fixed format. In this sense, you are coming up with conclusions based on the way the data is presented. Since the data is presented in a standard format you and every Joe out, there will/could draw the same conclusion. It is virtually impossible to put inductive reasoning to use here, since the data is fixed and presented in a standard format. When you look at a chart and use certain TA tools (better to use custom settings in our opinion as opposed to the standard settings) the picture/pattern one see’s is never the same for two given individuals, as the data has to be gleaned from the charts. Even the same individual looking at the same chart several times could end up seeing something different the more he or she looks at the chart. Technical analysis propels you to rely on Inductive thinking, and we believe this sort of thinking is several orders superior to the deductive thinking process. When Mass Psychology is thrown into the equation, the individual is pushed to rely even more on the inductive process.
Fundamental analysis, one only examines fixed data so you and everyone else generally arrives at the same conclusion. The same is true for so-called standardized Technical Analysis; the masses are taught to use a standard set of tools in a specific manner so no inductive thinking is involved. When you customize the settings, and you can do this with a host of TA tools, you very often are presented with a different picture. The very simple act of changing the settings sets the inductive process in motion. Therefore, when it comes to the markets, it is imperative that you do your level best not to be part of the herd. If you enjoy being used as cannon fodder, then being part of the herd or following the masses is the strategy you should pursue.
To summarize in fundamental analysis you simply read the data that is presented in a standard format and you and 1 million other Joes usually draw the same conclusion. However, when you step into the world of TA, it gets complex as you are basically analysing a picture. The saying that a picture is worth a 1000 words comes to mind. And when one looks at a picture, there is generally no mass consensus. As one masters the simple but effective concepts of TA, the edge they have over the masses generally widens.
Throwing mass psychology into the equation improves your odds of success even more. A very small segment of market technicians even bothers to employ this simple, but highly effective tool. This tool is so effective, that if understood and applied properly it can be used as a standalone tool. Individuals, who have mastered TA, assume that because they mastered some elements of TA, that they have no need to employ Mass Psychology in their analysis of the markets.
Understanding how the markets operate might appear to be a daunting task at first sight, but nothing could be further from the truth.
These simple and easy to follow rules will make the process a lot simpler. Off course, you need to put some sweat into the process, but the work involved is not that much.
1) Learn trend analysis, it has a psychological and TA component built into it already.
2) Mass psychology is simply the ability to recognize that one should never do what the masses are blindly doing. One also has to measure the degree of euphoria in the so-called contrarian groups. Most of these groups are nothing, but fashion contrarian’s that think it’s cool to try to act like a contrarian.
3) Paradox theory simply boils down to this rule. You never get what you desperately seek. Desperation creates a form of blindness, be it visual or mental; you are no longer fully in possession of your senses, and therefore, you are bound to make some grievous error sooner or later. The desperate only end becoming more desperate. Never chase something, seek it, understand it, and it will come to you. Those that chase only end up running themselves into the ground. We can use the analogy of a beautiful woman and a guy who wants to get her attention to make this concept easier to grasp. It is generally assumed that beautiful women are hard to approach or talk to. Beautiful women are only hard to approach if you are going to use a line, that’s because they have heard every single line out there and are basically sick of them. If you simply talk to them as you would to a friend (and by the way, try to look them in the eyes while you are doing this), you will be pleasantly surprised with the results. Apply this principle to investing, why try to use and study complex systems based on wave patterns or so-called black box systems, etc. You can learn trend analysis, and then slowly but surely add to this system by applying mass psychology and possibly paradox theory. In terms of technical analysis, try to master 2-3 TA tools/indicators. However, the goal should be to master them well, in contrast to memorizing how they operate.
The law of paradoxes, states that the desired result will not be obtained those who chase something; in fact, the one will end up with the opposite of what one was looking for. The idea is to seek and not chase.
The law of balancing; the equation must balance. So if you give more than you get, you will always receive less as the equation must balance. We examine these concepts in more details in the book that will be published shortly titled “sayings to live by”
“Man is an over-complicated organism. If he is doomed to extinction he will die out for want of simplicity.” – Ezra Pound 1885-1972, American Poet, Critic
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