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Monday, June 23, 2008

Why Michael Ballack is a good role model for the better investor

There are two kinds of people in this world - those who are crazy about soccer and those who aren't.

For the latter, who are missing some of the most exciting midnight entertainment of sudden-death penalty shootouts and stunning extra-time goals, Michael Ballack is an outstanding German midfielder with a rocket right foot (and the Austrian team will vouch for that!).

So what does Ballack have to do with investments? It's his left foot (not to be confused with Daniel Day Lewis' Oscar winning performance), with which he can kick the soccer ball just as hard and with immense power.

Which brings us to the unresolved debate about fundamentalists (pun intended) and technical analysts. Fundamentalists don't understand technicals; technical analysts believe that all fundamentals are reflected in the price!

Just as an international soccer star needs to use both his feet, the better investor needs to learn about the fundamental analysis of companies as well as study the technicals of price charts. Why?

Fundamental analysis looks at an industry, whether it is a sunrise or a sunset one, and then identifies companies within that industry, their growth rates, future plans, profitability, management quality, competitive advantages.

After doing all that hard work for a particular industry - let us say for infrastructure, you make a short list of three companies: DLF, L&T and BHEL. All supposedly great companies. If you had bought them in December 2007, you are losing 50% of your investment.

Technical analysis of individual price charts or the Sensex (or Nifty) in December 2007 would have indicated a severely overbought status indicating an imminent fall. Exactly the time when you should not buy.

More on this debate in future posts - so stay tuned!

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