Over on RealMoney Pro, Doug Kass has an excellent column in which he compares and contrasts his trading and investing style with mine.
As I've written many times I don't believe that any trading or investing style is inherently superior. Results will vary widely depending on the personality of the individual and the how they approach the market. A good technical trader will beat a mediocre value player and a good value player will beat a mediocre technical trader.
In developing your own style, the most important thing you can do is understand the styles that traders like Doug and I use and then add your own elements in a way that makes the most sense to you. The idea isn't to copy someone else but to understand the thinking and then integrate it into an approach that is suitable for you temperament, personality and manner of thinking.
Doug has always been a contrarian. He tends to believe that when the herd is stampeding into a trade, he wants to be on the other side of the action. When everyone hates a stock like Twitter (TWTR) , Doug is intrigued by the possibility that the mindless sheep might be wrong.
I prefer to put my confidence in the price action. When the herd of bulls is stampeding, I want to run with them as long as I can. I believe that more money can be made running with the unthinking herd than trying to predict when they might stop. Emotions are more important than fundamentals.
Doug is a fan of intrinsic value. He wants to identify stocks that are cheap and then wait for the market to appreciate that fact. I have two problems with that approach. First is that calculating intrinsic value is not as easy as it sounds. Valuation can be highly subjective. Even if you can calculate future earnings what is a reasonable multiple to use? Analysts will use complex spreadsheets with 100's of variables and still vary widely as to the correct value.
The second problem with the intrinsic value approach is that there is no way to know when the market may come to share the belief that a stock is undervalued. Finding a stock with intrinsic value substantially under its current price doesn't guarantee that the market will ever correct its mistake.
The vagueness of intrinsic value and the inability to accurately time when it will matters is why I don't give that approach much weight.
The heart of my approach is 'price is truth'. Nothing else much matters but the price action. Stocks are seldom priced correctly. What determines their value is the emotions that are at work. Sometimes stocks will become wildly overvalued and other times they will be cheap. I simply want to trade the movement as those emotions ebb and flow. I don't care what intrinsic value might be if a stock is moving in a direction that I like.
Charts to me are essentially an exercise in psychology. They tell us what the mood is and that helps us determine where things are heading. I don't think it's possible to predict far into the future but I believe it is possible to react effectively to short term shifts in price action.
Currently the market is undergoing some corrective action and is enjoying a sizable oversold bounce. It is making for great trading but I'm not convinced that it is clear sailing from here. It has nothing to do with intrinsic value or economic arguments. It is all about psychology and price action.
Hopefully Doug and I have provided some insight you can use to improve your own trading. What will work best for you will depend on how you think about the market.