Technofunda Investing

Technofunda investing is when you use both fundamental analysis and technical analysis in your research process. For many years, I used to be a purely fundamental investor. My primary focus was on understanding the business as well as possible, its triggers, the management and what impacted their performance, the competition. Over the years, I could figure out that I was missing out on something, but I could not figure out what.

I would buy stocks which would be growing so inevitably my errors of commission were very few and far between. Around ten years back I started the active process of reviewing my portfolio and thought process in an active manner every year (and then every 6 months). I could see that all the stocks I were buying were making money. I started feeling very good about my stock picking abilities. This continued for a few years.

But this changed after two consecutive years of the ValuePickr Goa meets where I and Hitesh Bhai, both being relatively early risers, would get up in the morning and go for a walk on the beach. In those hour-long sessions, I could see a completely different approach that Hitesh Bhai followed. Of taking more frequent and sometimes very large bets, which was something very different from my style. And boy, was it working well for him. Explaining with a cricket analogy, my style was more like that of Dravid, slow and steady, whereas his was more swashbuckling, like Sehwag. And we still remember Sehwag for being the only Indian to have two triple centuries in Test cricket and a double century in the one-day format.

So, I started learning technical analysis (which later led me to the quant side because of my programming background, but that’s a story for another day). What I immediately could see was that the mindset required to do fundamental and technical analysis was different. So, I did the first thing I thought was logical. I decided that I was the most comfortable as a relatively long term participant. I did not want to be stuck in front of a trading terminal throughout the day, so longer timeframe charts was what I started looking at. I could sense that if I could merge the two analytical disciplines together it would be greatly beneficial. I did not like the constant bickering and egoism of the two camps. The fundamentalists thought the technicians were snake-oil salesman and the technicians thought the fundamentalists were prized smug idiots!! I could see that in the annals of investors and traders with great long term track records, I found people across the spectrum of styles. This led me to believe that there is no style which is good or bad, it’s how we use it.

Once I knew both fundamental and technical analysis well enough, I found I could make much better sense of the markets. I could see why something was happening. So, another level of information flow started opening up in front of me. What other market participants were doing. When coupled with your own analysis, it can be a potent force.

Hitesh Bhai and I have been collaborating on our own investing for a while before we started Hitpicks. Hitesh Bhai uses a lot of technical analysis and some proprietary indicators and patterns for identifying stocks that can potentially move up before they make a move. This fascinated me. He called it the Prognostic pattern (after all he is a practicing doctor!!). It is a not a foolproof method but when it works it does really well. Added to good quality stocks and favourable fundamentals, it is a good option for those who want to play a medium-term game (between 3-12 months). That’s what we try in Hitpicks, the advisory service we run.

The biggest advantage that I have seen in using a Technofunda approach is to be able to concentrate significantly when both the fundamentals and technicals are aligned. That provides a much higher CAGR to the portfolio than otherwise possible. But it also has its downsides as well. This approach does have higher churn than a simple buy-and-hold strategy. Some like I keep saying, only those with a particular mindset can use a strategy like this.

Disclaimer: Hitesh Patel and Abhishek Basumallick have a  technofunda advisory at www.intelsense.in. The blog posts should not be construed as investment advice. Please do your own due diligence before investing.