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Who Knows Best – Fundamental or Technical Analysts?

Investing, when done correctly, can result in significant returns while bad investing decisions can result in disappointing losses. In order to generate high returns and buffer against loss, many investors make decisions based on recommendations by Wall Street analysts.

Our view at TipRanks is that as long as you follow the best performing analyst over time, the means of how the analysts reached his or her conclusions should not matter.

Yet investors often ask us, who performs better – Fundamental or Technical analysts?

Fundamental vs. Technical

Fundamental analysts rate stocks based on the company’s growth, earnings potential and other key metrics. The output is usually a rating in the form of a “Buy, Hold, Sell” and the expected price target for the following twelve months.

On the other hand, Technical analysts review the stock’s performance over time, trading volumes, and look for patterns that can predict the stock’s future behavior. This means that the company’s earnings reports, management or any other elements are completely irrelevant. The output would usually be a conditioned recommendation (i.e. Buy if stock reaches X, Sell when it reaches Y).

The Debate

The method by which an analyst reaches his or her conclusion provides a deeper insight into their rating. Thus, sparking the debate of which group of analysts perform better.

Professor Doron Avramov of Hebrew University researched this issue by examining the CNBC television show, Talking Numbers, in which every episode a Technical analyst and a Fundamental analyst debated if the chosen daily stock will go up or down.

Source: http://www.cnbc.com

Professor Avramov sampled 1,000 conflicting recommendations and divided them into five categories: Strong Buy, Buy, Hold, Sell, and Strong Sell. Each recommendation was virtually executed and measured over a period of 180 days.

So who performs better?

Professor Avramov’s study revealed that Technical analysts significantly outperformed Fundamental analysts in this time frame. In fact, if investors had followed the Technical’s Strong Buy ratings they would have made a 7.92% profit, as opposed to a -0.44% loss had they listened to the Fundamental’s rating in the following 180 days.

Moreover, if short sellers were to follow the Technical’s Strong Sell recommendation, they would have made an 8.85% return compared to the Fundamental’s 2.33% rate.

Technical Analyst Returns –VS– Fundamental Analyst Returns

What does this mean?

Professor Avramov’s study was a short-term observation which examined analysts on a television show, thus not necessarily producing the best overall results since the participants had little time to conduct comprehensive research and analysis, which in the case of Fundamental analysts requires more time… much more time.

However, these findings are significant and clearly show that Technical analyses pose great value when it comes to short term investing.

With tens of thousands of financial experts – including professional analysts, undiscovered gurus that blog, specific industry experts and more – there is no real need to conduct your own research; why waste your time reading an earnings report that thousands of experts already interpreted? Why conduct a technical analysis, quant research or any other sort of methodological research, when you can already pick the best performing experts from each category and follow them?

Click here to create your own TipRanks account and follow the top experts today!

Short selling? Find out who are the 10 most Bearish firms on Wall Street by clicking here.

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