- Investment strategies
- Why invest in the stock market?
- Buy and hold or technical analysis? Why you need an investment plan
- Value investing and short selling in volatile markets
- Using technical analysis to support value investing
- Investing in the unexpected
- Franking credits, explained
- What is dividend stripping and is it a sensible strategy?
- Investing in quality IPOs
- How to invest in stocks that benefit from a moving Australian dollar
- Reasons to avoid bonds when interest rates are low
- How value investors use Skaffold
- Quality, growth and value = a winning strategy
- Know your investor type and boost your performance
- Technical + fundamental analysis = better buy and sell decisions
- Fundamental investing
- Value investing and the price earnings ratio
- Intrinsic valuation models and methodology
- Value investments or value traps?
- How to find value stocks in a bull market
- Find value investments in expanding markets
- Why capital raisings struggle to add investment value
- How to value an insurance company
- Top stocks
- 5 qualities of top stocks
- How to find stocks with a competitive advantage
- Why return on equity is the best measure of business performance
- Using cash flow to find value investments
- Finding high quality dividend stocks
- Debt is not always a dirty word
- Why Skaffold share investment software makes sense
- Using economic factors to uncover the best investment options
- How do experts find top stocks to invest in?
- Investing in global stocks
- How to invest in international shares on global stock markets
- Benefits of investing in international shares
Using technical analysis to support value investing
With one simple technique you can avoid value traps and invest in stocks once they have upward momentum.
Have you ever had the feeling – the one where you are absolutely sure about a stock?
You have done your research - dotted the i’s and crossed the t’s - and then guns blazing bought into a low priced stock because it represents “great value” only, to find that once you enter into the investment it falls, or fails to rise, drifting sideways and weighing down your portfolio.
But you can’t sell it! God forbid! The fundamentals make so much sense!
What happens if you close out of the stock only to see the price rise? Your psyche could not bear that – not after you have invested so much time in research, and found such a wonderful company to buy.
So instead you decide the prudent thing to do is wait. I mean that’s what value investors do isn’t it? They patiently wait for the stock to rise, as surely it will.
Little do you realise you have been caught in a classic value trap.
You have been plonked with a laggard. You know you should cut your losses and move your capital into a more productive stock. But you can’t bear to.
You are stuck. A victim of fear of missing out, and a victim of the sunken cost effect of spending so much time on research that you don’t want to go to waste.
Sound familiar at all?
It doesn't have to be this way.
A simple technique to avoid value traps
By using this one simple technique you can learn to avoid value traps and invest in stocks once they have upward momentum, catapulting your stock into profit right after you buy it – or at least getting out with a small loss and free capital to invest in the next good idea.
Yet most value investors will frown on this approach. Why? Because it involves technical analysis, and value investors know it’s not technicals that move the market but fundamentals. And the proof is in the pudding right?
Mum and dad investors don’t have the resources (except Skaffold – Yay!), or the skill of professional fund managers so we can always do with something else, to help pick winners and supercharge our returns.
So for the rest of us technical analysis can be the secret sauce we can add to our value investing to turn it up a notch.
Value investing and technical analysis = a power combo
A typical value investor might wait for a high quality stock to be a certain percentage below its intrinsic value, say 20 per cent, before they buy.
Combining technical analysis, investors wait for a stock to be not only 20 per cent below value, but also wait for signs of upward pressure on the price – and then buy.
On a chart the contrast is something like this:
Once you have found a top stock you wish to purchase, you will need to bring up a monthly chart of the stock. You can do this in most share brokerage accounts, or in specialist charting software packages (hint: often Contract for Difference (CFD) providers have excellent free charting packages at no cost for account holders).
On the monthly chart plot a 3 period moving average and a 7 period moving average.
The next step is simple. Just wait until the 3 period moving average crosses over and closes above the 7 period moving average. Finally, make sure you check that the stock is still a good distance below its intrinsic value when you buy.
Patience is required
This strategy does require patience to wait for the right time.
Remember that you are not bottom picking. You need to be comfortable with the stock rising a bit first before you get in – and on occasion missing out on one that rises too quickly.
Other advantages of a value investing/technical analysis combo
There are a few other advantages of this method too.
Wondering what A1 Skaffold-rated stock to buy? Pick the one that is showing momentum on the price chart. Easy as pie! As you are not bottom picking, you now have a great place to put a stop-loss. Stick your stop loss below the low.
That way if you are wrong you can get out quickly, and can either get back in at a lower price – or you get to invest in a better opportunity, rather than holding onto a sideways moving stock in the hope that it will one day rise.
Avoid “catching a falling knife”
Market crashes present great buying opportunities for value investors, but how do you avoid “catching a falling knife”? Easy, wait for the market to bottom out first and then enter. When the market bottoms out you will have plenty of A1 stocks with rising share prices to pick and choose from using this technical analysis method.
Is value investing and technical analysis a forbidden partnership?
Using simple technical analysis techniques in conjunction with value investing can help provide you with an edge over the market.
Whilst it’s not a foolproof method, the ‘forbidden partnership’ can help you remain disciplined and objective about your purchasing decisions, and stops you from getting caught in the dreaded value trap.
It’s not a foolproof method, so you will want to practice proper money management as always.
By Sam Eder, founder spoonfedinvestor.com.au
Sam Eder is the founder of SpoonFed Investor – www.spoonfedinvestor.com - and a Skaffold Global member. Sam is fiercely independent–minded and has seen too much to accept the way customers get treated (and charged!) by the big firms. SpoonFed Investor is Sam’s way of helping people achieve their goals and be financially abundant while keeping more of their hard-earned savings in their own pockets.