There are 2 main ways to make some moola in the stock market:
1) Buy low, sell high
2) Buy high, sell higher
If you can short, you basically doubled the number of ways available. Since shorting is symmetric to longing, we can just limit our discussion to taking a long position. I note that there is another method which is to arbitrage - combining both long and short method. But let's leave that for another day.
The 1st method is best examplifed by fundamental investing. In essence, fundamental investing describe what prices SHOULD be by its derivation of intrinsic value.
The 2nd method is best represented by momentum investing. In essence, it describe where prices WOULD be by an array of tools such as charts.
1st Method - What Prices Should Be
The 1st method works best if you are patient money and you can wait for the price reversion to the intrinsic value. Note that it may take eternity to happen -i.e. no good.
It is best to couple this approach with identification of catalysts which would spark a reversion to intrinsic value. E.g. M&A activity, potential positive news release about new ventures/results which are not anticipated by market.
It is also advisable to couple this with a huge margin of safety - i.e. % difference between intrinsic value and current price. This is because you could be wrong in your "intrinsic value" determination. Firstly, your input may be faulty. Secondly, your model (based on the very flawed DCF, CAPM concepts) could spit out a wrong number because it converts the inputs into a faulty output. So you need a margin of safety to compensate for your potential errors.
2nd Method - What Prices Would Be
The 2nd method works best if you can identify trends and capital flows well. It puts aside the concept of intrinsic value. What is important is knowing how prices are determined (what prices would be) and not what is the right price (what prices should be/intrinsic value). I postulate that prices are determined by demand and supply. And the factors that affect future prices are current prices, preferences, budget constraints and probabilities. What is critical is the 2-way relationship between these factors and their 2-way relationship with fundamentals (i.e. feedback loop) and the changes in these components. I note that the expression of demand is in capital flows (voting with your $) and is a key focus of this approach.
This approach is more concerned about direction rather than a certain price point.
It might also be used to assess when the direction will change. So it can be for buying low and selling high as well (e.g. timing the bottom) but it is not an integral component of the concept.
Additional Dimension - Time
Let's add another dimension to the discussion - time. You can adopt a proactive approach or a reactive approach. You can invest in anticipation of relization of a certain event. Or you cna invest subsequent to the realization of the event. For example, you can invest in anticipation of a bottom. Or you can invest after it is clear that a bottom has been established.
The 1st method implicitly apply the proactive approach - you anticipate price to revert to intrinsic value. The 2nd approach can be both proactive and reactive. You can buy in anticipation of a change in direction (e.g. tops and bottoms) or you can ride the trend after the change in direction has been established.
It is often times safer to take the reactive approach because the proactive approach implicity assumes that you can hold on long enough for the event to occur or may even implicity suggest that you know when the event may occur. That requires 20/20 foresight. Which is not easy. It is easier to be reactive because the event has already occur. So yes, you may not be out before a market top but you never know it is a top until after the fact and it is presumptuous to say you know. So why not react only after the fact. You may not make as much money because you got out late but you may also have lost out on the continued climb upwards if you call the top wrongly.
The reactive approach put the odds in your favour. The proactive approach work well too if you have significant certainty about the event happening - e.g. you are sure positive news will be released.
Conclusion
There are basically 4 combinations
1) What Prices Should Be + Proactive
2) What Prices Should Be + Reactive
3) What Prices Would Be + Proactive
4) What Prices Would Be + Reactive
No one way is superior all the time and differ under different circumstances. But why choose? Use all 4!
Cheers.
