In my presentations, especially when speaking with new or potential new clients, the question usually comes up, “Why don’t more people use technical analysis?” or “Why don’t more folks use point and figure charting?”
Point and Figure Charting (then called “figuring”) was created by Charles Dow, back in the 1880’s. As a point of reference, Dow was the first publisher of the Wall Street Journal and also created the Dow Jones Industrial Average.
But yet today it is hard to find investment professionals embrace technical analysis, which I think is a shame. When a leader at a large investment firm speaks openly about using technical analysis (particularly point and figure charting), it gets our attention.
“If it wasn’t for the global financial crisis that began in 2007,” Sam Stewart, President of the Wasatch Funds, “…might never have considered using so-called technical analysis to help pick stocks.” Wasatch Advisors, the fund-management firm Mr. Stewart founded in 1975 and still runs, is well known for doing solid fundamental research. Wasatch manages approximately $19 billion in assets in 2014. “We used to be 100% fundamental analysis,” Mr. Stewart says.
In the fall of 2007, Stewart saw value in stocks. The major indexes were starting to drift lower then, and some sectors, including financials, were already tanking. Some stocks looked cheap to him, based on fundamental analysis, so he bought them—and lost money as markets plunged in 2008 and into 2009. If he had looked at the charts at the time, he’d have said to himself, “You are crazy” to consider buying, he now says.
Stewart said he employs point-and-figure charts, designed to display patterns in share-price movements in a way that makes it clear when a new upward or downward trend has emerged.
These trend charts give us CLEAR indications of what is in demand and what is in supply. Just like at the food store, when something is in great demand, prices rise. So when we’re looking at a point and figure chart, anything in demand, the chart moves higher. Anything with too much supply, the trend is lower.
Here is Stewart’s letter to shareholders: https://secure.wasatchfunds.com/Common/Chairmans-Corner.aspx
And here is a link to the Wall Street Journal article: http://online.wsj.com/news/articles/SB10001424052702303626804579506072190660050