Friends,
In the investment world, there are two very broad schools of thought for how to make decisions:
- Fundamental analysis: This focuses on the moats of the underlying companies, their growth prospects, and their valuations.
- Technical analysis: This focuses only on the charts and momentum of the stocks themselves.
If you had asked any one of us what we thought of technical analysis two years ago, we would have had a similar refrain: "It belongs in the same realm as voodoo and astrology."
In other words, we had a strong aversion to it.
But then, about 18 months ago, one of our friends added a level of nuance:
"What if you just layered in technical analysis on top of your already-robust fundamental analysis?"
We wondered what that might look like, so we gave it a try. Since enough time has passed, we've come to a surprising conclusion.
Technical analysis, as we currently practice it, has actually made us more patient investors.
How could that even be possible?
Let's use Mercadolibre's recent price action as an example.
On a fundamental level, we love the stock:
- Moat: This is wide and getting wider. There are network effects for e-commerce, low-cost production for logistics, and switching costs for the fintech side of the business.
- Optionality: Few companies have shown a knack for creating new revenue streams that build upon the strength of the existing business model (Mercado Pago, Mercado Envios, Mercado Credito, etc).
- Valuation: Based on my reverse DCF calculation (Stoffel, here), the stock is trading at very cheap levels.
Already, Mercadolibre is one of my largest holdings.
But I haven't added to it this year. And if you look at the chart below, you can see that's been a good move thus far.
That red line is the 200-Day moving average.
And in the technical world, it's never a good sign when a stock is trading below a falling 200-day moving average.
In the past, I would have immediately added more when the stock hit $2,000. But technical analysis (plus the fact that I already own a bunch) told me it might be better to be patient.
Thus far, that's been a good decision -- with the stock falling an additional 20% since.
That doesn't mean I'll follow the rules of technical analysis to a tee. It's just that keeping your mind open to new ideas — even ones that might once have been considered blasphemous — is key to continuing one's education.
Nothing in the world is more antifragile than curiosity. It not only helps you construct a more profitable portfolio, but it is also instrumental in helping you lead a richer life!
Wishing you investing luck in the months ahead,
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Brian Feroldi, Brian Stoffel, & Brian Withers
Long-Term Mindset
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