KWCP offers a subscription-based research service for self-directed and motivated investors. As a firm, we believe in educating our clients in both companies and investors and providing the broadest-based, practical knowledge possible. The research provides public investors an unbiased look into relevant names and stocks to enable investors to make their own best decisions. Below we list some reasons why we believe this is a better method for our investors to self-direct.
WHY SELF DIRECTION MAYBE BETTER?
With backgrounds in fund investment, NASDAQ-listed CFO, and investment banking on our research team, we are aware of certain inefficiencies that are inevitable within the capital markets. Here is a couple of reasons why we believe doing your own research and directing your own funds maybe beneficial to some educated investors.
- Noise of Wall Street and Common Sense. Wall Street has many constituencies that each have their individual interests. For example, the public company selling shares, the sell-side bank brokering the shares, and the buy-side fund investing in the shares all have common interests in providing the best information for the end investor. However, they each have different perspectives resulting in different messages appearing in different ways in the public arena. Their messaging is usually on point, and at times, it can be difficult to decipher where the message originated and what the vested interests (and competition) exist with the party that is speaking.
Considering that, common sense often comes into play when messages do not quite ‘smell right’, which is why often grandmothers using good ole’ common sense are at times able to outperform some very high-quality managers. In addition, with the quant and formulaic investors, aka ‘algorithm-based’ traders, capitalizing on a certain mispriced behavior patterns, the ups and downs and volitility only increases the noise when stock prices which no meaningful change to the company.
In the long run, fundamental based research with common sense on the quality of the company has a larger affect on the investment return.
- Fees and Cost Structure. Managers salaries and benefits must be paid and Class-A building rents do not pay for themselves. As a result, there is a real cost of managing funds. In addition to the upkeep fixed costs, there are the marketing costs associated with the fund to gain interest from personal money managers which can be a greater expense. Certainly, some funds and vehicles are worth the investment while others are not. So, while these managers are experts and professionals, they have a higher hurdle rate to overcome to match your personal investment rate.
- With Greater Dollars, Investment Risk Greater. To enter a larger block of publicly traded shares in a company, all things being equal, an investor may need to pay a higher price on average to enter that given position. A larger number of sellers usually must found. Likewise, to exit a larger position, the average price increases as well since to accommodate the size, traders must find larger number of buyers.
On the converse, someone like Warren Buffet has a considerable amount of funds to invest, and with that buying power, he negotiates very favorable terms and pricing on shares of companies in need of capital. However, only the giants can maneuver like that when no other funds have the interest or available funds. In most cases, investment interest is abundant on good, solid companies.
And with a greater number of dollars to manage, as funds get larger, finding good investments becomes more difficult so managers either must invest in lower quality investments or sit more funds on the sidelines.
Furthermore, if your personal amount to invest is too low, there is less of an ability to diversify investments which, in the long haul, helps returns. On the contrary, though there are limits to the affects of diversification once a certain amount of different investments is used, and therefore, smaller amounts in the same number of investments can yield good results with less risk.
- Nobody Cares About Your Money More Than You. If a fund manager loses your money, certainly they are responsible and remorseful. However, based on many factors, they may simply just be able to raise additional funds from other sources to continue their business. However, this does not help to recover your lost funds as they move on the the next source. We have known many sincere money managers that have lost substantial amounts in the market only to close their existing shop after the loses, only to begin a separate new fund with a brand-new slate.
RESEARCH: FUNDAMENTAL vs. TECHNICAL ANALYSIS
Here at KWCP, we believe in educating investors on all relevant aspects of the market. This specific article is to inform investors on the difference between two major groups on valuation analysis for stocks, fundamental and technical analysis, both commonly used when choosing stocks. Both methodologies are major categories implemented when gathering information, and like any philosophy or thesis, both strategies have their pros and cons, their advocates and adversaries, but it’s best you know when to use which.
Traditional research and forecasting of financial statements is fundamental analysis and touted by the academic financial community and used by the equity research community of investment banks and buy-side firms to deduce the future growth trends of stocks. Meanwhile technical criteria are often used by traders to quickly assess the likelihood of a stock to go up or down daily, if not hourly basis.
- Fundamental research is a method of evaluating the ‘enterprise value’ by attempting to measure the intrinsic financial value of a company. Analysts use discounted cash flows, market comparables, and historical transaction analysis to triangulate a specific value of a security in a ‘fully-efficiently priced’ marketplace which means when all investors are ‘rational’ and companies are ‘fairly priced’. Fundamental analysts also study the overall economy policies and trends and industry/sector specifications to evaluate the financial value.
- On the other hand, technical research is the evaluation of market trend by means of gathering investor behavior using statistics of market activity, such as past pricing and volume trends with respect to current events and market reactions, resulting in common patterns in stock price charts. These analysts do not attempt to measure a security's strict financial value but instead use stock charts to identify patterns and trends that may suggest what a stock will do in the future and are reliant on group psychology to determine the likelihood of a stock to go up or down in value.
Interested in Trading or Long-Term Hold? In a market of constantly changing figures and stock analysis, all information is valuable. Revenues, profits, expenses, market share, and balance sheet items, like assets and liabilities, are all important characteristics of fundamental analysts, whereas technical analysts could not care less and use terms such as 'head and shoulders' patterns to determine price. To best understand the complete picture, it is advisable to understand both and what aspects each measure. You can say that fundamental research is good for long-term investment as opposed to trading in and out of a name over a brief period like technical charts may help with, but even in purchasing a name for the long term, it helps to understand the technical situation in entering or exiting a name causing real price difference.
Both are Valuable, With Understanding. Fundamental research bases company worth on the aggregate discounted cash flows of the company in perpetuity assumes a completely rational market with respect to financial related to stock prices. It also assumes the market prices efficiently to those values. On the other hand, technical research assumes flawed and inefficient human and group behavior related to prices and reaction to trends in circling around a fundamental price. It takes the assumption that everyone knows the rational value but groups react around it and play upon those reactions.
- Problems with Fundamental Analysis. Technology companies that trade at very high prices related to the earnings of the company present unique problems for valuation. While trends in pricing is easily explained by technical analysis, it maybe difficult to justify high prices determined by solely based on the financials. As a result, analysts assign a multiple to companies with certain companies and industries receiveing higher multiples given their relative advantages in the industry (or with regards to industry, the industry’s relative advantage compared to other industries). This reflects the pricing and money flow in a capitalized society where the leader often gains a lion’s share of the spoils disproportionate to their relative share of the financials and market.
- Differences in multiples and Strategic Advantage. However, even beyond a higher multiple some companies trade at even a higher price than can be justified even by multiples alone, as seen evidenced by many technologies leading companies, both public and private, seen in the capital marketplace today. At that point, the strategic advantage is often assessed by industry experts to determine actual strategic values in sectors and sub-sectors within an industry in how the landscape of any newly forming industry will evolve and change.
Valuation is Never Perfect. As with any component of real life, it is not an exact science, and valuation can fluctuate rapidly based on changing investor sentiment and developing current events. Even the greatest fundamental analysis has an element of judgment and estimation based on the quantitative numbers to come up with a more accurate value, theoretically. And technical analysis simply assumes it is there, and maybe very useful in finding an entry an exit point for a stock that you determine valuable using fundamental analysis. Resultingly, we believe understanding both are valuable in the real world though academics do assume that values do eventually become efficient and return to their rational intrinsic values.
Click below for research articles on these values: