This commentary originally appeared at 7:48 a.m. EDT on Oct. 3 on Real Money Pro -- for access to all of legendary hedge fund manager Doug Kass's strategies and commentaries, click here.
Earlier this week, a fellow Real Money Pro contributor and I went back and forth on the merits of technical analysis.
Let me start by saying that there is no secret investment sauce or elixir that will deliver traders and investors a recipe for investment success. There is no quick answer to capture the holy grail of investment results -- not in charts, algorithms or historical patterns or pattern-recognition formulas.
On the latter point, Jim "El Capitan" Cramer appropriately and roundly criticized pattern-recognition observations on "Mad Money" Tuesday night -- he called them worthless, incorrectly authoritative, a pernicious and a lazy exercise that serves as nothing more than a "lovey blanket" (i.e., a piece of cloth that makes you secure but provides, in reality, little security).
And I agree strongly with Jim.
But I understand why many want to believe. Taken by themselves, charts, algorithms and/or historical patterns provide a veneer of authenticity in just the sort of easy and quick sound bite conclusion toward which traders and investors are drawn. I frequently see blind faith in the effectiveness in some of these exercises, and, frankly, it concerns me. These approaches (and others) provide an attempt to simplify an awfully complex investment mosaic. Similar to Jim's "lovey blanket," they provide a false sense of security.
Investment selection is not as simple as interpreting a chart (through technical analysis); it is a complicated combination of macroeconomic factors, the level of interest rates, individual stock analysis, sentiment, valuation and many other variables. Technical analysis, in particular, should be used in conjunction with the above, not as a means unto itself. Again, there is no secret sauce in analyzing a stock's price chart -- a chart simply tells us where a stock has been, not where it is going.
Though I am a fundamentalist, I am not attempting to say that the answer is found either through fundamental or technical analysis.
I utilize and incorporate valuation, sentiment, macroeconomic factors, interest rates and many other instruments in my investment process, but fundamental research is the foundation of all my decisions.
I use my purchase of Altisource Portfolio Solutions ASPS in late 2009/early 2010 at about $15 a share as an illustration of the value of fundamental analysis. Altisource was spun off from Ocwen Financial OCN , and I spent about 75 hours researching the company. I devoured the company's financial statements. I had discussions with management and with the company's competition. As well, I spent a great deal of time talking to regulators and bank managements, which would ultimately provide the fuel for Ocwen's and Altisource's profit growth via the necessary disposition of their mortgage-servicing portfolios.
There was no chart at all to deal with when I purchased the shares of Altisource at $15, but I came to the analytical conclusion that the company had the potential to earn $5.00 to $6.00 a share a few years out (2012), or only 2.5x what I was paying for the stock. The rest is history, as the shares rose to over $100 a share in less than three years.
Fundamental research, when done properly is hard work -- done well, it takes time. I research companies, hopefully, in a hard-hitting, analytical way, and I often look to develop variant views from consensus (on both shorts and longs).
I choose not to utilize technical analysis in a meaningful way in my stock selection and decision-making process, however, as fundamental analysis (as a dominant determinant) just works for me. Technical analysts feel the same way in not adopting fundamental analysis, and I respect their views but deeply question decisions that are made solely on a technical basis or that are based on algorithms and/or pattern recognition.
Though technical analysis is only a small part of my investment decision process, I do refer to the charts, and when I do, I want to hear from someone such as Tim Collins, as few do it better than him. Tim is in the class of my favorites, which also includes the Helene Meisler, Justin Mamis, Bob Farrell, Jeff Hirsch and Walt Deemer.
I keep charts, algorithms and historical pattern recognition in their proper perspective -- and so should all of you.