As with any pursuit, the investment world is always changing. A decade ago, the focus was on sub-prime debt and a potential banking crisis. Today, investors are more concerned with Donald Trump’s policies and political challenges in Europe.
However, the way in which investments are analysed is constant evolving, too. While basing an investment decision on industry-specific knowledge and a company’s fundamentals as per value investing was once the norm, today advancement in technology means technical analysis is becoming more popular. Does this mean value investing is becoming outdated? Or, should investors stick with tried and tested techniques?
A new era
Technological change in recent decades has allowed private investors to gain an insight into the investment world which was not possible in previous years. Today, it is possible to obtain real-time pricing free of charge, while also having access to a vast array of charts, data and information which can be used to determine whether to buy or sell.
As such, technical analysis has become increasingly popular and is now beginning to become somewhat mainstream. It is often reported in media outlets that a company’s shares may be worth buying or selling because a particular chart or series of charts shows that this is the case.
A worthwhile pursuit?
However, there is a lack of evidence that technical analysis works. Certainly, it may be proved right some of the time, but unlike with value investing there are no exceptionally successful, famous investors who have made $billions through the use of technical analysis.
In contrast, value investing has numerous, highly successful proponents such as Warren Buffett, Charlie Munger and Benjamin Graham. Their investment styles are not identical, but they all have in common a focus on the quality of a company’s business model and a consideration of whether the price offered represents fair value. In other words, while technical analysis relies purely upon what a chart tells an investor at a particular moment in time, value investing relies more on a human factor in terms of a subjective assessment on the quality of a specific business model.
As technology improves, it seems likely that technical analysis will become more prevalent. After all, people tend to be interested in new products, rather than old ones. However, this does not mean the new and more exciting products will be more successful.
In the case of value investing and technical analysis, the latter probably seems more impressive to the layman. After all, value investing is simple to understand and can be undertaken by even the most inexperienced of investors. However, it is a proven method which, in the long run, is likely to deliver relatively strong returns. Therefore, far from being outdated, value investing remains as relevant today as it always has been. Certainly, change will always be a part of investing. But as Warren Buffett said, investors should ‘beware of geeks bearing formulas’ if they wish to be successful in the long run.