Don't Be A Mystery Box Investor: Blending Technicals, Fundamentals and Observationals For A More Stable Approach

Quick, don't think, just answer – what's your favorite thing about investing? I can't answer for you, but I can tell you mine.

I admit it, I have a problem. I'm a true stock junkie through 'n through. I love the markets. I love the whole system of it. I love the fact that living, breathing, growing companies can be publicly traded on giant exchanges that give the rest of us an opportunity to own a share of something larger. I love the process that is our global financial machine, with endless data and amazing stories that make the business world feel like some sort of eternal entertainment faucet. I follow the stock market the way many others follow professional sports, and I'm positively hooked.

And yes, of course, I love charts. Technical analysis is this beautiful balance between the objective and the subjective. Charts take raw, factual data and paint it across our computer screens like a canvas, something for us to explore, analyze, find meaning in and discover direction from. It's a uniquely fascinating way to watch the markets.

But I'm No One Trick Pony, Folks

My love of the markets goes far beyond the charts. I have never seen myself as simply a technician. Sure, I'm primarily focused on the technicals, and charting is my first weapon of choice. But just like the balance described above between the objective and the subjective, I try to strike an equally appropriate balance between what I see as three crucial pillars of any sound investing strategy: technical, fundamental, and we will refer to as "observational".

I've written about this before, as you may well know. Last year, for example, I wrote a blog article about part of my Sunday investing routines, and I encouraged readers to "make room for your observational side". The following clip from that article is feels quite relevant today:

"I see myself as something like 65% technician, 25% fundamentalist, and 10% "observationalist". I follow the charts, and they will always be my primary tool. I back up what I'm seeing on those charts by looking for strong fundamentals as a secondary filter. But lastly, I need to look at the world around me and feel confident in the investment I'm making. Recent price trends or a strong earnings report are not always enough. I want to see that the business behind that stock is present in my day-to-day life. I want to take note of how its products and services are being used by real people to do real things. When my observations line up perfectly with strong technicals and robust fundamentals, that combination is rock solid.

This may sound simple but it's true. Many of my best investments have come from simply observing the world around me and taking note of which businesses seem to have a real hook into society. From that jumping off point, I can check the charts to see how those stocks are doing, look back at their earnings history to see which ones are growing and gaining momentum, and buy the ones that appear strongest both technically and fundamentally."

So What's My Favorite Thing?

My favorite thing about investing is that it gives me a unique perspective on the world around me. Being an active investor challenges me to think critically and analytically about my observations. It allows me to put my convictions to the test and makes crystal clear in no uncertain terms when I am right and when I am wrong – rewarding me with gains or penalizing me with losses. In short, I love that being an investor gives me a unique reason to care about things that are so much larger than me.

For this reason, I am emphatically perplexed when I see fellow traders and investors buying stocks based purely on the technicals or solely on the fundamentals.

I hear it all the time... "I have absolutely no clue what this company is or what they do, but the chart looks great so I'm buying!"

Or in what I may have to deem an even more egregious offense... "This stock is historically undervalued based on the P/E alone, so I'm adding to the position as price falls!"

From my perspective, investing is like a stool with three legs – technicals, fundamentals, and the real-world lets-think-about-this-for-a-minute "observationals". When you buy a stock based exclusively on the technicals or only on the fundamentals, you're buying a one-legged stool. I don't know about you, but the last time I tried to sit on a stool with one leg, my night didn't end too well.

Don't Be A Mystery Box Investor

Circling back to the title of today's special, here's my new challenge for you: don't be a mystery box investor. What I mean by that is, don't forget that every stock you buy is backed by a business behind it. A company. A service. A product. Something you can touch, feel, see, try, test, use – the list goes on and on.

Your research isn't complete when you stumble across a great new chart with a strong uptrend and find that the company has just reported top and bottom line beats on its latest earnings call last Thursday. No matter how sound the technicals and fundamentals look – no matter how stable your two-legged stool seems to be – you've got to put that third leg on the stool. Stocks shouldn't be mystery boxes full of surprises for you to discover after you put that hard-earned money on the line with a new position. It's only prudent to open it up, look inside and see what you're getting yourself into.

Here's the good news: making room for your observational side as an investor is a blast! You get to dig deeper. You get to spend time researching the business behind your newest trade. To me, this is arguably the most fun part of the process. You have the chance to be creative, think critically, put your own business savvy to the test and explore the bridge between the purely-financial side of the stock market and the business side that ultimately fuels it.

The signoff below is a direct reference to this idea. Money In, Eyes Open. Watch the world around you while you participate in it as an investor, and find opportunity even outside the price charts or financial statements. You'll be rewarded for your deeper exploration.

Money In, Eyes Open.

- Grayson Roze

VP of Operations, StockCharts.com

Author, Trading for Dummies (Wiley, 2017)

Author, Tensile Trading (Wiley, 2016)

StockMarketMastery.com