Fundamental Investing vs Technical Trading

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In investing, there are two schools of thought; Fundamental Investors and Technical Traders.

In real estate investing, the best example of a Fundamental Investor would be someone who does long term buy and hold properties. These investors are looking at the market on a macro level and rely on the underlying fundamentals of the market rather than the technical price of the asset.

A technical trader is someone who “flips” properties. These investors are generally trading properties that they hold for no longer than 6 months at most. They buy, force appreciation and sell in a short period of time. These traders are more focused on the buy and sell price of a specific asset than the underlying market fundamentals.

Both strategies can be successful and both can make a lot of money. In the end, Fundamental and Technical strategies should be used together to create cash both immediately and in the future.

The most important thing about choosing a strategy is that we understand the pros and cons of Fundamentals and Technicals. We need to know how to find value in each strategy and know which strategy to use in a given market.

In real estate investing, a fundamental investor will look at market fundamentals such as:

1)   Industry – Industry is important because Real Estate is only valuable when there are jobs around to pay for it. This is why a city block in Detroit can sell for $1 and a single high-end tiny apartment unit in Manhattan sells for $20 million dollars. Detroit has a troubled economy because the local industries have disappeared and so have the jobs. Manhattan on the other hand has an abundance of jobs and that is why real estate in Manhattan is worth obscene prices. Jobs and industry are one of the most important fundamentals of real estate.

2)   Net Migration – Are more people moving into a geographic area or are they moving out? If more people are moving in, demand goes up and prices will rise. In markets where oil is discovered, real estate skyrockets because of all the new people that move in to take on the new jobs. Western Canada is littered with oil towns that have steady positive net migration because of the “black gold rush”.

3)   Transportation – Is the market we are considering accessible or not? Can you transport goods in and out of the market? Northern Canada is filled with useless real estate because there has been no transportation-established far up north. If people cannot easily move to and from the piece of property, chances are, it’s worthless.

Investors who play a fundamental game have the benefit of slow moving markets and can make educated choices based on slow and steady research. Over time, if chosen correctly, fundamentals can make create insane profits with very little work. When I do buy and holds I always pay very close attention to the fundamentals to make sure that I am parking my money in the best way possible.

Technical investors are much different from Fundamental investors. Fundamental investors care about the:

1)   Short term technical movements in the market

2)   Specific entry and exit prices of the market

3)   Specific short time frames.

Technical traders do not really invest in a market, but rather trade in a market. When I flip houses, I think like a technical trader: I look for a distressed or under valued asset, force appreciation and make a calculated speedy exit.

Since the positions are short in technical trading, I don’t have to worry as much about industry, net migration and transportation that move slowly over months and years. All that matters is the entry price, exit price and that the market holds while I own the asset. Since real estate is a slow game, especially in my market (Winnipeg), I usually don’t have to worry about a sudden downturn in the market.

What is more important in flipping houses is making sure that the end user (the customer), desires to purchase my product and that they can afford it. Many flippers/traders get stuck because they flip in areas with no demand or areas where the end user does not want to live. Pay very close attention to the customers, and specifically the customers with money. Always give them what they want.

In my career I have switched many times from a “cashflow” (fundamental) strategy to a “cash” (technical) strategy. Depending on the needs of my business, I will switch strategies as required so that I take advantage of opportunities as I find them.

If I were to start over in real estate, I would start with a “cash” strategy and convert to “cashflow” over time. The beauty with real estate is that there is something for everyone and the more creative you get with a strategy (generally) the more money you can make.

Thanks for reading,

Stefan Aarnio

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