The Hindu Business Line : Analyse, my dear Watson!

Dr Watson proudly looked at the super-baby he had produced through years of DNA mutations. He said, "I picked a great one after doing a lot of research, carefully considered the reasons, convinced myself that it is a great buy; like buying a stock based on fundamental analysis."

The baby wiped his drool and volleyed back, "I would just buy it because many people who bought this must have done all the research; I would also check with the Florida real estate index and find that the prices are going up. Thus, you can invest in a property expecting it to go up, like buying stocks using technical analysis."

Dr Watson laughed, "I disagree. Before I altered your genes and spliced them in the lab, I did years of study on your dad and mom. Checking their health, their DNA structure and so on. Why did I do it? To ensure that you live a long and healthy life.

"Similarly, if you want to invest in a company, the first step is to analyse if the company is producing consistent earnings and if it is free from debt, to avoid debacles such as Enrons and WorldComs. I am a `fundamentalist', I check for the financial stability of a company before investing. I would then check if the price is right, because a fundamentalist would never invest in a company that is overpriced.

"I believe in investing in a company that I am likely to hold for the long term. Being a patient and prudent investor, I would have picked up some of the best companies such as American Express, Pfizer, Bed Bath and Beyond and CDW Corporation. As a fundamentalist I don't believe in buying and selling shares on the fly. I am willing to wait till the stock goes up."

"I would do the reverse. Not wait for a long time," said baby Crick. "Even in procreation, I simply followed the gene-altering pattern adopted by research scientists like you and created a new baby. That is successful too, though she is a little annoying.

"I am a technical analyst, I don't look at the financial health of a company. Instead I believe that history repeats itself."

Ron, Crick's father, was amused. "So which approach would work the best?"

Baby Crick spoke at length: "Grandpa, being a fundamentalist would not have invested in, say, Google. He would be sceptical about the company as the earnings are purely based on advertisement and the company has no other revenue stream.

"However, I, being a technical analyst, would have learnt that if so many investors are investing in the company, there should be a reason behind it. I would, therefore, jump in when the share price go up. Imagine, what an opportunity a fundamentalist would have missed!

"During September 2004, when Google was rising from a mere $85, inching slowly towards $100 and rising to $150, a technical analyst would be simply learning that when so many investors are buying, there should be a reason. Thus, I would have invested in Google and now the price of Google has gone beyond $300. A technical analyst would have made more than 100 per cent by investing in Google."

Dr Watson said, "My dear grandson! We all know that to reproduce, a cell must copy and transmit its genetic information (DNA) to all of its progeny. To do so, DNA replicates. But sometimes, copying errors happen because of unpredictable environmental factors, such as sunlight or cigarette smoke.

"Similarly, when you consider technical analysis, even though patterns repeat, a company might fall short, because of, say, poor financial health, which you do not measure while doing technical analysis.

"For example, Jamdat Mobile, the maker of cell phone games, fell from $29 to $22 in just one day and that is a loss of 25 per cent. As a fundamentalist, I wouldn't have invested in this company at $29, as I avoid investing in higher price."

Grabbing a spoon of cereal, Crick said, "There might be DNA mutations or copying errors, but aren't scientists trying to work on minimising the DNA copying errors. The same way, a technical analyst can buy stocks at the right price following the patterns and studying the charts. Let me prove this. What would you do when a financially healthy company like Symantec's (the maker of Norton anti-virus) stock price falls from $24 to $23 to $22.50, as it happened last week?"

"Simple," Dr Watson replied: "I would have bought as and when it kept dropping, because I believe that if the price of a good stock falls down, then it is a great buy."

"Aha," the baby let out an angelic laughter. "No doubt it is a great buy. But think of it this way. Using technical analysis and following the history of patterns of Symantec Corp, and studying their charts, I would have learnt that it would fall down to $21.50 and not below.

"Thus, a technical analyst, would wait till the prices of shares drops to $21.50 and then buy the shares."

Ron laughed, "Can't believe you are applying genetic research theories to stock picking."

Dr Watson said, "The biggest advantage for me, a fundamental analyst, is that I invest only in sound companies and thus, over the long term I make very good profit. I do admit that learning to analyse the fundamentals of a company requires the effort to master the different methodologies involved in evaluating the fair value of the company. I buy when the prices of the shares go below the fair value."

"True," said Crick, "I must admit that even though technical analysis is simple, one has to be careful as misinterpretation may lead to wrong judgment."

Ron said: "Who makes more money in the stock market? A fundamentalist or a technical analyst?"

Baby Crick answered, "I agree that a fundamental analyst makes a good return over a longer time. Technical analysts invest only when they know that the prices are going to go up, and thus lose the advantage of initial growth. By combining fundamental and technical analyses, an investor can profit well and also make much more returns than anyone."

Dr Watson turned to his son and said: "Ron, can you find out why Microsoft shares have never gone up beyond $30 for almost the past two years and never below $24? Or when Panera Bread fell from $66, and why it never went below $55?" Ron cuddled his baby and said, "Sure. I will use both fundamental and technical analyses; or to put in your language, adopt the `double helix' solution!"

Racy@thehindu.co.in

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