There are two primary methods used to analyse securities and to make investment decisions: fundamental analysis and technical analysis. Fundamental analysis involves analysing a company’s financial statements to determine the fair value of the business, while technical analysis assumes that a security’s price already reflects all publicly-available information and instead focuses on the statistical analysis of price movements.
Value Investing
Further described by Investopedia, value investing is an investment tactic where stocks are selected which appear to trade for less than their intrinsic, or book, values. Value investors actively seek out the stocks they believe the market has undervalued. Investors who use this strategy think the market overreacts to good and bad news, resulting in stock price movements which do not correspond to a company’s long-term fundamentals. This overreaction gives the value investor an opportunity to profit buy stocks at a deflated price.
Warren Buffett, Peter Lynch, and other successful investors focus on value investing in identifying investment opportunities. By reading through financial statements, they seek to identify cases where the market has mispriced stocks and capitalise on the reversion to the mean.
Technical Analysis
Technical analysis, on the other hand, is a trading discipline employed to evaluate investments and identify trading opportunities by analysing statistical trends gathered from trading activity, such as price movement and volume. Unlike fundamental analysts, who attempt to evaluate a security’s intrinsic value, technical analysts focus on patterns of price movements, trading signals and various other analytical charting tools to evaluate a security’s strength or weakness.
Technical analysis attempts to understand the market sentiment behind price trends by looking for patterns and trends rather than analysing a security’s fundamental attributes.
Here at Third Perspective Capital we are firm believers in a multifaceted analysis approach. Not an ‘either / or’, but rather as many information inputs as possible. Value investing is a subjective process, and manual research intensive. As for technical analysis, keeping an eye on the multitude of indicators across 1000s of stocks, is humanly impossible, let alone bringing these two approaches together.
The Third Perspective
It is in this multifaceted analysis approach where our value proposition of The Third Perspective lies. Artificial Intelligence and Machine Learning augments the human analysis capabilities to provide a differentiated source of information in order to make sound investment decisions. Our predictive models analyse 100s of technical indicators and other features and continuously evolves and re-trains itself.
The summary information of daily stock buys and their back-testing results, is often the starting point for stock buy short-listing, followed by a more comprehensive fundamental analysis.
Once invested, the monitoring of your portfolio for exits is crucial. The daily summaries also include sell signals for this purpose, available on our premium service.
How to interpret the data:
The blog post is the result of predictive models, calculated for each stock symbol.
The models are trained using supervised machine learning techniques and aim to predict at least a 15% increase in price in the following fortnight. (in bins of strong, medium and weak)
The model features are a host of momentum, volatility, trend and volume technical indicators* that are historically analysed for correspondence to the future fortnightly target. The model accuracy is an indication of the confidence of the model correcting predicting the outcome when scoring an unseen test dataset from the training data.
The models are then backtested over all historic data, seen and unseen during training, to produce the backtest results.
Similarly, sell signals are generated by predicting the oposite outcome.
*We are continuously experimenting with other features like macro economics, market sentiment, bond price movements, google trends etc. and will include these over time where found to increase model accuracy. However, philisophically we take somewhat of an efficient market hyopthesis approach by believing the current price already accounts for all the information in the market. Therefore, technical indicators based on volume and price alone should be a good proxy for all the information out there.
In summary, these results are by no means a ‘silver bullet’ and should be interpreted as a ‘third perspective’ to compliment further technical- and fundamental analysis… and just basic common sense!