Question

1a) How might an investment strategy based on technical analysis
differ fundamentally from a strategy based on earnings
performance?

b) Give two reasons why an investment strategy based on growth
might under-perform or over-perform and investment strategy
likely to be used by a value oriented investor.

Answer 1

1A)

Investment strategy based on technical analysis: In technical analysis strategy basically analyzing past stock price action data based in different time frames like Monthly, Daily, Hourly data, and deciding trend of the stock and making an investment decision. In technical we completely ignore the fundamentals of the stock and only focus on its historical price/performance.  

Investment strategy based on earnings performance: Here major focus on major publicly traded companies Analysts' Forecasts on future earning based on different economic scenarios. How the company met its expectation earning/ revenue growth. Based on that decision taken for investment on that stock.

How Both Strategy differ from each other: Investment strategy based on technical analysis ignoring fundamentals of the stock its earning report and only focusing on past price performance. It is said on technical analysis that if the fundamentals of a stock are really good it will reflect in its past price performance itself. So there is no requirement analyzing the fundamentals of the stock. "Price Discounts Everything" believing in this principle technical analysis work. While Investment strategy based on earnings performance based on firms earning forecast, EPS, and major fundamental earning report.

1B)

Value Investors are those picking Higher Book Value stocks as compare to its market value. Where growth investors focusing more on companies those are expected to grow at much higher pace than its competitor/industry benchmark. Why Growth companies may overperform or underperform respect to  Value stocks

• Growth stocks are considered as risky stocks. Looking at its Book lower book value but expanding its operation too quickly may be using more debt financing or another mode of finance. Think about any economic downturn these companies will affect most as with little change in earning may affect its profitability due to higher leverage/interest. So growth companies may underperform.
• Growth investor always looks for smaller firms. Which inherits a risk. But smaller firms in good economic conditions outperform bigger firms.