A major milestone was reached last week in the markets. For the first time, investors can now purchase Bitcoin without buying it on a crypto exchange and for crypto enthusiasts, this is a huge step in what the market has deemed to be the right direction.
Proshares ETF is the first US Linked Bitcoin ETF that offers investors an opportunity to gain exposure to Bitcoin returns in a convenient, liquid and transparent way. According to Proshares, the Fund seeks to provide capital appreciation through managed exposure to bitcoin futures contracts.
On the first day of trading BITO, up to $1billion was traded and according to the Financial Times, between 12% and 15% was from retail investors and others from institutional investors and other market participants.
BITO was the first ETF asset to reach $1Billion according to Bloomberg Data and this is a reflection of investors appetite to Bitcoin and cryptocurrencies as a whole.
This is widely considered as a positive step especially considering how the market has reacted to it and could mark the start of other crypto linked ETFs. The fund closed up over 2.5% on its first day of trading, closing at $41.94 per share.
Taking a closer look at the holdings of BITO however we can see it does not actually hold Bitcoin. Instead it holds Bitcoin futures and there is a difference between these.
The price and performance of Bitcoin futures are expected to differ from the spot price of Bitcoin.
What is a Bitcoin Future
Before considering what a Bitcoin future is, let us recap what a future is. When you enter a futures contract, you are betting on the future price of an underlying asset. Think of it as an agreement between you and the issuer.
So in effect, you are looking to pay a certain price, at a future date, for an asset and on the day of expiry, the asset is handed over to you and once settled you would have either made a profit or loss.
A Bitcoin future is a financial instrument that allows you to purchase or sell Bitcoin at a future day and price.
BITO ETF tracks the futures contracts on Bitcoin not actual Bitcoins and what that means is when you get into a contract and the expiry reaches, if the price of Bitcoin is higher than what you paid for the contract, well you have made some money and if Bitcoin is lower than the price of the contract, then you have made a loss.
By purchasing BITO, you are betting that the price of Bitcoin will rise so you aim to benefit from that. It is important to note BITO is not first of its kind when it comes to tracking a future.
USO for example is a US oil ETF that tracks the future price of Oil and the same can be done for Gold, Silver or other commodities.
Bitcoin Vs Bitcoin ETF: Which should I Buy
Should an investor buy BITO or Bitcoin or even both of them? There is no simple yes or no answer and it depends on different factors including how long the position is held for, an investors goals and how tech savvy they are.
BITO as we now know tracks the future price of Bitcoin; this means the spot price of Bitcoin i.e buying Bitcoin right now at an Exchange will be different from the Future price.
Buying the ETF and holding for a long time means you will bear the cost. This can lead to investors purchasing BITO for short periods of time as opposed to holding it long term.
There are a number of differences between purchasing Bitcoin or BITO and here are a few of them.
1: Regulation: Cryptocurrencies are still not as regulated as other asset classes and BITO is an attempt to have some regulatory framework while gaining exposure to the performance of Bitcoin. BITO being an ETF will have certain protections similar to other asset classes.
2: Fees: It may be cheaper to purchase BITO rather than buying Bitcoin on an Exchange. BITO however like other funds, has an expense ratio of 0.95% which means for $95 for every $10,000 will towards paying for expenses. This is pretty high considering low cost index fund have an expense ratio of around 0.4% or even lower.
3: Trading Hours: Crypto exchanges are open all day everyday so there is an opportunity to buy or sell at any time. Trading ETFs on the other hand are subject to the opening and closing hours of the Exchange they are listed on.
4: Safer: There is an element of safety when it comes to accessing the performance of Bitcoin without some of the risks associated with cryptocurrencies because it is not uncommon for Exchanges to be hacked and accounts stolen. Trading an ETF (BITO in this case) is relatively safer because you are not at risk of losing any coins.
5: No need to be Tech Savvy: Buying an ETF from a broker is quite straight forward and more investors are more likely to be familiar with this as opposed to having a wallet or multiple, managing them and keeping them safe.
What the Future Holds
It is difficult and dangerous to try and predict the future however there are number of trends that can be observed as a result of this new development.
Investors appetite for cryptocurrency is yet to abate and there is an expectation for more funds to be launched that track the performance of Bitcoins – so the spot price of Bitcoin.
The different financial agencies will review and determine if investors can access for example in the UK, retail investors are not allowed to trade BITO.
Other funds can be launched to provide investors exposure to other cryptocurrencies such as Ethereum and others that have significant market capitalisation. Further down the line, there may be a fund that will track the performance of multiple cryptocurrencies too.
Advantages of Bitcoin ETF
There are a number of advantages when it comes to the new Bitcoin ETF.
Reduced Complexity
The complexity of having a digital wallet, password or storing anything is eliminated when it comes to trading the ETF.
Exposure to Bitcoin Performance
Investors can gain exposure to the performance of Bitcoin and have some protection that other regulated asset classes have.
Hedging and Shorting
It provides another option for investors to take a short position in Bitcoin using the ETF.
Disadvantages of Bitcoin ETF
Not the same as Bitcoin
You do not actually have Bitcoin and in many cases, the future price will differ from the spot price.
Exposure to Volatility
You will not be protected from the volatility that cryptocurrencies are known for.
Final Note
The launch of a Bitcoin linked ETF marks several things for different investors or spectators. For some, it shows Bitcoin and Cryptocurrencies are here to start and can be considered as an asset class.
The creation and approval of this ETF by the regulators is also seen as an attempt to have some sort of regulatory framework around Bitcoin which is not necessarily a bad thing because perhaps more sophisticated investors will pay attention to Bitcoin and other Cryptos at large.
For other crypto followers who had faith all the way, this is can be seen as a reward for the work done over the year to get regulators to acknowledge Bitcoin.
BITO as it is named allows investors to benefit from the performance of Bitcoin without necessarily being tech savvy, having multiple wallets and the concern that it can be lost or the Exchange is hacked.
There are differences in the way in which BITO the ETF allows investors to benefit from the performance of Bitcoin and as more Funds are approved, more options will be made available to investors to benefit from the performance of other Cryptocurrencies too.
As an investor it should be sufficiently clear that fundamental analysis is the starting point before deciding to invest in a company. Here are a few situations where fundamental analysis is especially needed.
Unexpected changes in the economy such as the impact of the Wuhan Virus or Covid-19 is an example of where fundamental analysis is needed. Many businesses were forced to close down as several lockdowns followed and as a result these companies were not getting cash needed to function. The fundamentals of these businesses had changed as a result.
When a business is not getting money or a reduced supply of money because it is unable to sell its products, that is a sign of potential danger. If no money is coming into the business, then there is hardly any prospect for the company to make profits.
Other companies during the lockdown would have seen a boost to their balances as a result of the changes in consumer habits during the lockdown. Consumers bought almost everything legal online and thinking about the follow through in that process, delivery companies would have seen an increase in demand.
Commercial real estate investors in warehouse or others that are used by delivery companies would have seen a good return over this period of time. Shrewd big players have scooped up warehouse or order processing spaces as this article reveals.
Companies like Zoom have become ubiquitous in our daily work life. Netflix, Disney and other similar companies have seen their number boosted by new subscribers to their products and services.
A significant amount video content has been consumed during this period of time so YouTube or better yet Alphabet the parent company of Google has seen an increase in revenue and profit over this time.
Situations like those listed above are an opportunity to delve deeper into these companies and see which one is the most promising now and into the future as best as possible.
Fundamental analysis can help you see which companies can survive a downturn much better.
Inflation is another recent ‘event’ that can present opportunities and closely looking at how companies may be impacted by inflation will show if the opportunity is worth it.
Some companies do better during periods of high inflation while others do not fare as well. Carrying out analysis should help clarify any doubt as to which companies to invest in.
In a situation where you already have a positions or invest in a company, it is worth reviewing that investment from time to time to make sure your financial expectations are still valid.
Companies are dynamic entities; reacting to opportunities, regulations and other factors in the market place. Unless you have a passive investing strategy where you can invest, hold and wait long term, it makes sense to review the investment made into these companies.
Fundamental analysis is beneficial when looking to re-invest in a company. In some cases the outcome of the investigation may suggest a reduction in the position but then that is the point of analysis – to invest or not to invest.
Which type of Fundamental Analysis
There are different approaches to fundamental analysis but the ultimate goal is the same; to find a company or companies to invest in.
The main styles are the Top down approach and the Bottom up approach.
Top down Approach
With this approach to fundamental analysis, an analyst will be looking at the overall economy, followed by the different sectors, the industry and finally the companies in those sectors.
Economy: This includes looking at the Gross Domestic Product of that economy in question. Other aspects such as Employment, Interest Rates and Inflation will be considered as you try to determine if the economy is in a good state or not.
The Central Bank in that country may choose to increase interest rates, leave them as they are or reduce them and those action can have an effect on the companies operating in that economy.
Industries: The next thing to consider are the industries in this environment that are thriving or look promising in those economic conditions. A low interest rate environment means money is easy to borrow and if inflation is within the target, there may be no incentive to rein in consumer spending.
Sectors: Next the sectors in those industries can be analysed further based on the economic conditions and trends with the aim of finding companies that will benefit from the economic climate.
Companies: This is the final stage where we look at the companies in this sectors, compare them with their peers and decide on which to invest in based on research.
Bottom Up Approach
This involves looking at the company’s fundamentals and extending the research to the industry, sector, economy and other macro events that may be occurring. With this method you are looking first at the microeconomic factors and looking further at the macroeconomic factors.
The financial statement, balance sheet, cash flow statement and other relevant documents will provide into how the company functions. Once this is done, the focus can now move to how that sector is performing and where the growth can be.
An important take away here is to understand how the approach taken determines and influences the decision to invest in one company over another.
Consider this example and the relevant timing. Q1 2020, a bottom up approach shows Netflix is promising; the top line numbers are good, earnings are looking good and the overall fundamentals of the company are positive.
The lockdown in March later that year boosts the numbers for Netflix because more people are locked down and have a bit more time to watch their favourite shows. In this example you can see how bottom up approach and the macro events come together to boost Netflix.
In the same manner a slump in the price of oil due to restrictions on travel would hurt some companies and cause others to profit. It should be obvious that transportation related shares such as airlines and cruise ships will suffer.
Furthermore the lack of tourism means hotels, car rentals and any companies that would otherwise benefit from the lack of restrictions, will have to face hard times. Starting by looking at these macro events and drilling down further can highlight potential opportunities especially when the economy began to open up.
Summary
It is wise to carry out analysis before purchasing a stock or even a company bond and fundamental analysis presents a way to go about it. In some situations it could be when taking a new position in a stock or in others, trying to decide if you want to buy more or reduce your exposure depending on the prevailing economic situation.
There are a two main approaches to fundamental analysis namely top down or bottom up. The main differences between these approaches is the sequence in which different factors are looked at as a part of the decision making process.
A top down approach start by looking at the economic and political situation in a country, the industry of interest, sector and then any promising companies in that sector.
A bottom up approach reverses the process by looking at the fundamentals of the company, the sector, the industry and then the prevailing economic conditions.
A billion dollars is a large number regardless of how you see it. If you had to spend $10,000 a day, it will take you 2,740 years to spend a billion dollars. That is a long time and a lot of money to spend on each day.
How about a Trillion dollars? A trillion dollars, is a billon dollars a thousand times and at the time of writing, there are over five companies that have a market capitalisation that exceeded $1 Trillion dollars.
As an investor what does this actually mean and how can it enable you make better decisions? Let us first look at what a company’s market capitalisation is. The market capitalisation of a stock is the number of outstanding shares multiplied by the price of a share.
This is where things get interesting as an investor because it begs the question, is the company in question really worth $1 trillion dollars? The price of a stock is what two parties agree to trade it for but that does not say much about how much the company is worth.
When you buy a stock, you own equity or a piece of that trillion dollar company. That must be a satisfying feeling however how much value can you get while you own that stock and after you choose to sell it?
Fundamental analysis allows you to fundamentally analyse a company in order to determine what it is actually worth. The process of carrying out fundamental analysis includes looking at reports and filings and other aspects of a company to determine what it is worth.
Applying this strategy, the price only serves as a benchmark to help you determine if the company is over priced or undervalued. Apart from that, you pay very little attention if any to the price of the stock as it is more of a distraction.
In this article we will look at what fundamental analysis is and why it is important for to an investor.
Fundamental Analysis Definition
Fundamental analysis can be defined as a process of gathering information on a company, analysing the information for the purpose of making an investment decision.
Accountants and auditors can look at a company’s book, asset and liabilities to determine if the company is in good shape. The main difference here is that with fundamental analysis you are looking to make an investment decision off the back of the results from the investigation.
It goes beyond coming to a conclusion that the company in question is in good financial shape; it goes further to look at factor like the management, the products and even the economic conditions in which the company operates.
Fundamental analysis is the close study of different aspects of a company such as financial reports, management team, income statement, balance sheet and cash flow statement in order to have a clear picture of what a company is worth.
There are different ways to approach this so let us consider a very basic form of this. If we divide what we are looking for into three parts, we can see a clear picture.
How does cash come into the company.
How is the cash spent within that company.
How is the cash that comes out of the company spent.
When more cash comes into a company that is a good sign; it can mean the products or services are selling well and customers love it. It is a sign the company is growing and expanding and ultimately this is positive news for an investor. The Income Statement gives insight into this aspect of the company.
For a company to sell its products, money has to be spent on researching and developing the product. Additionally the team that markets the products, manages logistics and delivery are part of the process of getting the product to market and also incur some costs.
There are financial ratios and other figures we can look at that will help us understand how the financial resources are spent within the company and if we are getting a good return on investment.
After the money has been made, how much of it does the company keep and what portion it is re-invested? Behind all this is a management team making decisions that will affect the value of your investment.
The important thing to remember is that when you purchase a stock, you own a share of the company and that is an amazing thought in itself. It also carries responsibilities and unless you like to throw your money and time away as an investor, it is necessary to take time to analyse a company in detail before investing.
Why is Fundamental Analysis Important
Any form of analysis is important because it allows you to see in detail and better understand what you are looking invest in.
Let’s say you are buying a house for example; as an investor, you want to add a new residential property portfolio. How will you go about it? I am certain you will not simply buy a property for the price it is listed at.
Ideally you will look at the area, see how much three or four bedroom properties sell for in that area, determine the finishing standard of the property. Is there a shed, loft or conservatory, garden or anything else that can potentially add more value.
Fundamental analysis is obviously different but the principle is the same and as an investor you are looking at companies where you can invest your money and get a return on your investment and eliminating any speculation in that process.
Fundamental analysis allows you to approach investing with hard numbers and facts rather than being impulse driven or going off tips from your uncle’s brother’s friend’s sister’s cousin.
Speculators look at the price of an asset and determine if it can be sold for a higher price without taking any fundamental analysis into account. As we mentioned earlier, the price is simply what two parties agree to exchange a product for.
The price gives no indication of the actual value of the product in question and this is why fundamental analysis is important because you are looking beyond the price.
Different types of participants carry out fundamental analysis and each of them has a reason why they do fundamental analysis.
Bond holders for example will do fundamental analysis to ensure that the company will be around long enough for them to recover what they have invested in it, and the yield over that time.
When a company issues a Bond, the buyer of the bond will expect to get their initial invested money returned after the set period of time expires with any interest on a yearly basis. If the company falls apart or goes bankrupt, the bond holders will be left holding thin air.
Employees can do fundamental analysis in the company they work in and there are a number of reasons why they will do so and benefits from doing that. Employees can see which parts of the business is growing or where future opportunities are. Employees can negotiate a better pay package too if their unit performs well.
Investors that trade ETFs or any Index funds can benefit from fundamental analysis because it can reveal with companies that will be added or removed from an Index and this presents opportunities.
Depending in your investing strategy, you may choose to do fundamental analysis and focus on companies that meet a certain criteria. If you are looking to invest in companies that are growing fast or growth stocks, you will focus more on certain aspects of the company.
If your focus is dividend yield, you may focus on other aspects of the company but in both cases, you still carry out fundamental analysis to get a closer look into how the company is doing regardless of what the price may indicate.
Summary
The process of carrying out fundamental analysis allows you to gain an insight into how a company works, what the financial health of the company is, how competent the management is in comparison with their peers and how much of a future the company has.
The outcome of this process should be a clear understanding of how this company stacks up and if it is worth you investing your hard earned money – and time not to mention.
Fundamental analysis significantly reduces any knee-jerk attitude to investing in a company. These days it is easy to get caught up in the hype of a stock and this can come from a number of places; channels that show financial tickers rolling across the screen are not necessarily there to educate but to entertain.
Fundamental analysis allows you to understand the company behind the ticker. It presents an opportunity to look closer at the products the company produces, the team running the show, how the customers are reacting to the products and overall the value of the company.
It is an essential part of the process of deciding what company to invest in, how much and for how long. Other methods to analysis which we cover here focus on other aspects of the market and trends rather than the underlying company.
Some people may treat the stock market as a casino and in some cases it works for them but in the end the house always wins. As a serious Investor, fundamental analysis gives you a chance to participate in the market and win not by speculation but studying the fundamentals of the company.
Analysing any potential purchase is a part of the process but when it comes to investing, a different type and deeper level of analysis is needed.
Naturally, if you are looking to purchase a car, house, or sometimes clothing it is not uncommon to shop around. The question here is why would you shop around when you know what you are looking for? Perhaps you are trying to get a fair price for what you are looking to buy.
Analysis is what you do or at least expected to do before you buy something and there are different reasons why you will do so. A few of the reasons are that to ensure you are paying a fair price for what you are purchasing and if plan to sell it in future, your analysis will include cover the fact that this ‘thing’ you are purchasing will be worth something in future.
This is the basis of analysing a potential investment. Putting the price aside, trying to determine the value of the item in question and more importantly, making sure that you can sell it at a future date for a much higher price than you paid for it.
It is not about selling the asset for a higher price; you can also earn some cash in the form of dividends. A better way to understand this is thinking of a rental property. As the tenant pays the rent, you get some returns in cash and as the property gains in value (capital appreciation), you benefit from the asset being worth more than what you initially paid for it.
When it comes to purchasing a financial asset there are three main types of analysis you can do namely fundamental, technical and quantitative analysis.
With fundamental analysis you are looking at the fundamentals of the asset you are purchasing and assuming it is a stock, you are looking at things like what does the company do? How does it make money? Who runs the company? Who are its competitors? What products does the company make and how good are they?
Technical analysis however involves looking more at what the market is pricing this asset and where the trends suggest the price will go. It could go up, down or side ways and what you are looking for with technical analysis is an entry or exit point for a trade and you aim to accomplish this with the help of indicators.
Quantitative analysis works by gathering large amounts of historical data about the asset or market and trying to determine how the behaviour of the market participants will affect the price.
In this article we take a look at the different methods of analysis, their benefits and drawbacks of each of the methods. We also look at which methods are preferred for which asset classes and any other techniques to consider.
Fundamental Analysis
What is Fundamental Analysis
Fundamental analysis is a methodical approach that includes pouring over a company’s financial statements, getting to know the management and looking closer at any documents produced by the company in an attempt to understand what the company is worth.
Companies that trade on major exchanges in most countries in the world are required to produce statements and closely examining these statements and coming to a decision to invest is what fundamental analysis is about.
Fundamental analysis allows you to go beyond speculating and guesswork. It presents an opportunity to discover promising companies, spot red flags in others and find undervalued or potential growth stocks.
Fundamental Analysis Basics
Financial Statements
In order to carry out fundamental analysis, there are a number of statements the company produces that are used for analysis.
Income Statement: This report shows the financial performance of the company over a period of time. It may be for a quarter or for the financial year for that company.
Balance Sheet: This reports allows you to see a companies assets, liabilities and shareholders equity. It helps you understand how much debt the company has and how it can survive hard times that may come up.
Cashflow Statement: This report shows how much money comes in to the company, and how the money is used in the company to fund its operation.
Financial Ratios
Using the information available from the financial statements, it is possible to come up with financial ratios as a quick reference guide so to speak, to understand how the company is performing.
These ratios can be divided into the following categories.
Efficiency Ratios: These allow us to measure how effectively a company is using its human and capital resources.
Leverage Ratios: These ratios show a company’s level of debt or debt load.
Liquidity Ratios: These measure a company’s ability to pay it short term (due in a year or less) and long term debt.
Market Value Ratios: These ratios allow you to evaluate the share price of a company’s stock.
Profitability Ratios: This ratio measures a company’s ability to generate income.
Here are a few popular financial ratios.
Debt-to-Equity: This ratio shows how much debt the company has taken or can take.
It can be calculated as follows:
(Outstanding long term + short term debt) / (Book Value)
Earnings-per-Share: This ratio allows the net income earned per share of the company’s outstanding stock.
It is calculated by:
(net income) / (number of shares outstanding)
Dividend Yield: This ratio measures the how much dividend is given to shareholders. It is calculated by:
(dividend per share)/(share price)
Gross Margin Ratio: This allows you to measure the gross profit and net sales to see how profitable the company is.
It is calculated as follows:
(Gross Profit)/(Net Sales)
Fundamental Analysis Advantages
Intrinsic Value: Fundamental analysis is one of the best ways to closely determine a company’s intrinsic value and this is crucial because you want to pay for what it is worth not necessarily the value as suggested by the current price.
Business Understanding: It allows you to understand how a company works. You can see how the company stacks up against its competitors.
Long Term: Fundamental analysis is a great tool for long term investments as it helps uncover companies and sectors that will be growing in the future.
Fundamental Analysis Disadvantages
Time Consuming: It is a time consuming process especially looking through financial statements and coming up with a decision to invest.
No Guarantee of profit: Being able to see how a company has performed over time does not guarantee a profit in future. Fundamental analysis does offer some protection from obvious red flags however a situation such as the great recession in 2008 will affect many companies across the board.
Garbage in Garbage Out: If the company produces false numbers in its financial statements, investors can be deceived by the conclusions they come to. Luckin Coffe is a recent example of this.
Technical Analysis
What is Technical Analysis
Another method of analysis an investor can use to determine what to buy and sell and when to, is Technical Analysis.
With technical analysis, an investor is looking to determine the price movement in an asset by looking at historical prices and statistics in the market.
While fundamental analysis looks at the company or other factors behind the asset class, technical analysis primarily looks at how the charts and trends or patterns suggest the price of the underlying asset will move.
The Different Types of Charts
Charts and indicators are to technical analysis what financial statements are to fundamental analysis. To carry out technical analysis, the analysis is done on a chart and here are few of those charts.
Area
An area chart is similar to a line chart but has an area highlighted as it helps visualise the price movement.
Candlestick
A candlestick chart shows a green or a red line and this simply indicates where the current price is above the opening price or below the opening price respectively.
Line
A line chart shows the different data points on a line and it usually depicts the current price from the closing price. If the current price is currently above the closing price, the line will be green and if the current price is below the last closing price, the line will be red.
Indicators
What are the main types of indicators
Technical indicators are used to determine when to enter or exit a trade. When performing technical analysis, these indicators are especially useful because they show where there is volume, in what direction the trend is moving and any other relevant information you will need to know.
The two main types of technical indicators are Overlays and Oscillators. Here are some well known Technical Indicators.
Most used Technical Indicators
Average Directional Index: Also known as the ADX, it works on a scale between 0 and 100 and it shows how strong a trend is — whether the trend is up or down. It is based on a moving average of the price over a period of time.
Bollinger Bands: This indicator provides a price range the asset trades in and the range will indicate any volatility on the asset. If the bands are closer to the price line, it indicates a lower volatility and if the bands are wider, it denotes higher volatility.
Exponential Moving Average: This indicator is similar to a moving average and it shows momentum in an asset class. It is more sensitive to price changes.
Moving Average: Sometimes known as a simple moving average and it shows the direction of a price trend, without taking into account any short term spikes in the price. A simple moving average can be used over a 20, 50 or 100 day period (or any for that matter) to give a closer look into how strong a trend is with regards to an asset.
Moving Average Convergence Divergence: MACD shows the changes in momentum and it does so by comparing two moving averages. This can help you identify opportunities to buy or sell and including support or resistance levels.
Relative Strength Index: The RSI is a number between 0 and 100 that helps identify momentum. A value of 30 or below is generally considered oversold and a value 70 or above is generally considered overbought.
Stochastic Oscillator: This indicator compares the closing price of an asset to a range of its prices over time and helps identify momentum and how strong a trend is. Similar to the RSI, this oscillator is usually a number between 0 and 100 where a reading of 20 or below indicates an oversold and a reading of 80 or above show the asset is overbought.
Technical Analysis Advantages
Range of applications: One of the main advantages of technical analysis is that it can be applied to any asset on any timeframe. Technical analysis can be performed on Commodities, Forex, Equities, ETFs, Options and other asset classes.
In sync with the market: This means, depending on your timeframe you know what exactly the market thinks and is doing when it comes to an asset you are looking at. With fundamental analysis, in the near future, you may be proven right if you come to the right conclusion from your analysis. With technical analysis the result is sooner rather than later.
Knowing when to buy or sell: Technical analysis can point out entry or exit points when it comes to trading an asset and this is crucial because the trend as they say, is your friend.
Quick decision making: With technical analysis, you open a chart, add indicators, see where the trend is and make a decision using information that is readily available for free. You can look at a 5 minute, 15, 30 or 60 minute chart and make a decision to trade off the back of that.
Technical Analysis Disadvantages
Mixed Signals: Two different indicators may suggest different courses of action where one signal may suggest a sell and the other may suggest the asset is bought.
Spikes in Data: When there is a temporary spike in the price of an asset due to volatility, it may skew the data and the interpretation of that information which can lead to the wrong action carried out.
Over Analysis: It is possible to over analyse an asset due to the sheer number of different indicators out there and knowing which one to apply and pay attention too comes with practice. This can lead to mistakes and can increase the amount of time it takes to make a decision.
Quantitative Analysis
What is Quantitative Analysis
Quantitative analysis makes use of research, data, modelling and statistics to gain insight into the market to help with making investing decisions. It allows you to determine how events in the real world may affect the price of the asset based on data collected.
This method looks at historical price data and will use make use of some technical indicators to build a trading strategy based on how the asset class has traded in the past. It can also uncover relationships between asset classes depending on the economic environment.
Quantitative analysis includes gathering relevant data, back testing it and often times creating trading strategy (coding it) and applying it to the market.
Advantages of Quantitative Analysis
Easy to verify: Since the data is available, it is easy for anyone to backtest the data and verify the result of the trading strategy.
Decision making: The decision making process here is much easier since the findings from the data, back test and any strategy off the back of that will show which strategy is best and this in contrast to technical analysis where two or more indicators can give mixed signals.
Speed of Execution: A large amount of data can be analysed at a time compared to a single analyst looking at different data. Applying the right trading strategy means opportunities can be found and taken advantage of much more quickly.
Disadvantages of Quantitative Analysis
Not forward looking: Since the models are built off historical data, some future possible events are not taken into account that can spell disaster.
Predicting the future: In some cases the trading model is improved to cater for possible future events however it is difficult to predict the future to an accurate degree. And this can lead epic disasters. Long Term Capital Management is an example of this.
Fundamental Analysis or Technical Analysis
Now we have had a brief introduction to the different ways in which an asset can be analysed, we can look closer as what analysis should we apply when investing in bonds, stocks, commodities, forex or any other asset class.
Bonds
A bond is a debt instrument where the issuer of the bond pays interest to the bond buyer for the duration of the bond and pays pack the principal when the bond expires.
A bond can be issued by a government or a company and in a situation where the bond is issues by a company, one can carry out fundamental analysis, technical and quantitative analysis.
You can look at the financial statements of the company to determine if they have the ability long term to pay their bills. Combining this with technical analysis will help highlight if this is a good or bad time to buy.
A government bond can be seen as a safe haven or a flight to safety and in that case, the market may be reacting to an event.
Since a government does not produce financial statements such as you will get with fundamental analysis, it is difficult to perform fundamental analysis on government bonds.
One form of analysis you can do before purchasing a government bond is by looking closer at the economy such as employment rate, interest rates and other indicators that should show the government will be able to pay back its debt.
Bearing that in mind, there are ratings agencies such as Moodys that rate bonds and can help give an indication as to which bonds are safe i.e triple A and others that are not.
Commodities
Whether it is oil, gold, lean hog, orange juice and other commodities out there, it is a bit challenging to carry out fundamental analysis going off the back of financial statements because there is no single commodity company out there that produces an income statement, balance sheet to cash flow statement that can analysed on behalf of all the players in commodity space.
On the other hand, research can be done to look into harvest, droughts market events such as the impact of lock downs on the price of crude oil and using technical analysis, see how the market reacts to these events and trade accordingly.
In some cases where a disease that wipes out some animals which means demand is even further increased. Recently china announced the outbreak of a disease that affected its pig production so this gap in supply affected prices.
Stocks
When it comes to evaluating stocks, all the methods of analysis can be applied. Fundamental and technical analysis both have their part to play when analysing a company and as a savvy investor, it is crucial to know how to carry out both and understand what course of action the signal suggests.
The outcome of fundamental analysis may show a company has strong fundamentals however may have suffered a bad quarter or not quite met earnings estimates for one quarter and the market may react negatively to that news – albeit for some time.
In such situations, timings key and it may be better to wait for the noise to settle before purchasing the stock.
Quantitative analysis can also be done for aspects of the company to further improve the quality and detail of the information and decision made off the back of it.
Forex
When it comes to analysing forex currencies, technical and quantitative analytical methods are mainly used. There are some ‘fundamental’ factors that determine how a currency may trade against another such as commodity prices, interest rates, employment rate, etc however by and large, technical analysis is used to interpret the effects of those numbers on the market.
There are no financial statements to be analysed such as cash flow or income statements when it comes to currency pairs so fundamental analysis in that sense has little to no impact here.
This table below illustrates what methods of analysis work best for the different asset classes.
Fundamental Analysis
Technical Analysis
Quantitative Analysis
Bonds
YES
YES
YES
Commodities
NO
YES
YES
Stocks/Equities
YES
YES
YES
Forex/Currencies
NO
YES
YES
Asset Classes and Analytical Methods
Summary
When it comes to investing for the purpose of getting value from an asset we are about to purchase, it is imperative to perform analysis and there are three main types.
Fundamental analysis looks at the fundamentals of the business allows you to better understand the company behind the ticker.
Fundamental analysis is done by looking at the financial statements a company produces and coming to a decision to invest – this is what separates you an investor from an auditor or accountant.
Technical analysis is done by looking at indicators and patterns that show entry and exit points for a trade. It can be performed on any asset class and the aim is to buy or sell an asset at the right time.
There are a number of indicators that show the price trend, volume and momentum of an asset. All these enable an analyst to make decisions on how to invest.
A quantitative approach to analysing an asset captures a lot of data and relevant stats to determine how the asset will trade. The data is backtested and usually a trading strategy is created off the back of the analysis.
When to use Fundamental or Technical Analysis
Considering the different types of analysis mentioned above, there are situations where one is more appropriate than the other however it depends on how much time and knowledge you have.
Ideally it is better to apply both styles of analysis before purchasing an asset class as they provide different outlooks that will help the investment making process. The aim is to gather as much relevant information as possible.
For example, sometime in March 2020 the market was down and by that I mean there main indices in the US, UK and across the world due to the lockdown as a result of Covid-19. Good companies based on your analysis were still good companies because the fundamentals as of that date had not changed. Many of those companies such as Netflix, Disney and Amazon have bounced back and done better.
Technical indicators of these stocks on the day in March would have suggested a sell due to the heading in which the market was going but fundamental analysis will suggest the fundamentals of the company are still the same so selling at that point in them may not seem like a good idea.
This simple example shows why applying fundamental and technical analysis is necessary. When it comes to quantitative analysis using this example above, if the data model is forward looking to capture a situation like this, a better decision can be made by the trading strategy.
A situation where there is a 10% or more movement in the market in any direction if incorporated in to the data set, can be used beneficially from a trading point of view.
There is no substitute for winning and it is a great feeling if not one of the best. I enjoy watching sports not necessarily because I follow a particular team or player.
I enjoy seeing people win and behind that win or victory is a stage, a process, a story and the victory is the accumulation of sacrifice, pain, sweat and disappointments along the way. And that of course presents opportunities to learn.
It is a great feeling; fists clenched, teeth grit and a feeling of euphoria – ah the sweet taste of victory and lets not forget to mention those endorphins the brain rewards you with.
What is Winning
In this article we consider winning to be the ultimate goal for your endeavour and what that means is if your sights are set on winning the world cup or a tournament, then getting through the group stages is good but is not quite winning.
Accomplishing that ultimate goal is winning (victory as you may want to know it). There are battles along the way and they are relevant in the journey to the ultimate goal which is winning.
What it Takes
For individuals in sports, the stage is mostly in the public domain. Training for long periods of time and then playing in full view of spectators, having to deal with he discouragement and intimidation from the opposing team is also something consider.
However beyond the screams of adoring fans and the taunts of opponents, long before the confrontation, the match the seeds of victory are already sown.
In other settings winning is much more than a one match affair. It could be long hours of study in order to get a qualification or degree, physical exertion to get in shape or something even more personal.
The ability to win most importantly comes from an internal mental attitude. The physical aspect of winning is a small aspect of what it takes compared to non physical aspects such as mental fortitude, focus, discipline, perseverance, all of the things that are not visible at first glance.
Checking in with Lady Luck
I once read a quote that said ‘I find that the harder I work, the luckier I get’ so in a way, we create our luck. There is no denying working hard is good but there is an aspect of winning that nether side may control and that could be down to luck.
Looking at some of the successful people even in the sports and business world, having a talent or desire in a particular field is a good start and a distinct advantages however a considerable amount of hard-work is still required for success to be realised.
Even after working hard a lucky break is sometimes needed in order for your hard-work and talent to be in full view of the world. Luck does play an important role in winning and while you wait to be lucky, work hard. Simple as.
The Anatomy of Victory
One of the reasons to observe people or teams who win in any walk of life is the opportunity to learn lessons from their quest to being the best in what they do.
There is something to learn about how they succeeded and it leads to questions such as who did they face? Was the opponent better prepared? How much of a role did luck play in that victory? How did they win? What drives them?
The answers to these questions will help you in your journey to succeed or why you should be on a journey in the first place.
Why you need to be Winning
Taking part in anything for the sake of it is not enough – you need to win. Some people are not competitive granted but this is much more than that.
When you win, a number of things become evident and we will examine those below.
Winning is the culmination of your efforts over a sometimes long period of time and is a reward to you for persevering.
When you win there is an opportunity to tell your story. For every victory, there are many contestants and would-be victors who never made it either due to giving up or being defeated or failure.
Your story is important and serves are encouragement and has lessons for other people who are looking to you as inspiration.
Winning gives hope to many people and it can sometimes be considered trivial but is necessary as it allows them to participate in your joy and identify with your journey. And because you have accomplished the seemingly impossible, they know they can do it if they do not give up.
You develop confidence to tackle bigger challenges that would make you better at what you do. More success leads to more success and helps you discover your limit so you can push past them.
Why may not be Winning
Here are them main reason why many people do not win.
You are unsure of what ‘battle’ you should be fighting. It seems pretty straight forward but many people who do not win are not even fighting in the first place. You need to determine what is worth your time, ideals or whatever it is and apply yourself to the ‘battles’ within that space.
A lack of mental stamina or fortitude and discipline is another possible reason people do not win. Lately I have instances where a person or team is in a losing position and despite the distractions, they maintain their focus and win in the end.
In other cases they are ahead, become complacent and end up losing. The unseen aspect of a victory is a greater determinant of ultimate victory and that should be the focus. Your mindset – do you think like a winner or like someone who just wants to take part?
Choose your battle wisely and save your time and energy for what is important. Not everything or everyone for that matter is important and learning to say No will serve you well. By the way, No is a complete statement of its own and does not need a why attached to it.
Having a sense of purpose and a reason to win are important aspects of winning because it helps keep you grounded, focused and driven especially when times get hard which they will.
Summary
Winning in your ultimate quest is everything because it is the accumulation of your effort and hard-work over time and with a bit of luck too. Many victories are for you to enjoy but the sacrifice of people who have placed you in a position win cannot be ignored.
When you win, the sacrifice, prayers and whatever form of investment people have done for you is recognised. Winning is a reminder that you are one of the few that made it that far and many failed along the way. Of course an element of gratitude and respect is necessary in the process.
There are a few lessons to learn from people’s success and when you win, people will look at your life, your endeavours and see what lessons they can learn. Your victory can inspire people and cause them to find something worth living and fighting for.
These are some of the lessons to learn from every victory:
1: The Person/Team: What is their story and how did they get to this point? History adds relevance to the context. The depth from which they may have risen is an important drive.
2: The Process: This is a crucial part of a victory. Understanding the process that led to winning is important as it highlights lessons and ways to improve and do things better. So hopefully it will not take you as long to win.
3: The Prize: What do they stand to win is an indication sometimes on the value of the fight. Winning for a Nation is very different from personal wins. Succeeding in overcoming an addiction or something personal may not get a lot of applause but that experience is filled with valuable lessons.
4: The Cost: The costs can be personal, financial, physical and in other ways. Understanding what someone gave up or sacrificed to succeed makes winning even rewarding.
Winning in your life goal is everything because it is a recognition of the sacrifice you and others have made in your success and is the best way reward them.
Taking part is a start but winning should be the end goal. Now go out there and win!
