Stock investing strategy-Fundemental investing

FUNDAMENTAL INVESTING

As mentioned in the earlier posts, fundamental investing is all about investigating the financial health of the company and its competitive advantages. The financial health is judged by analysing the earnings growth, revenues, debts, quality of management, profitability ratios, cash flow etc..Apart from company specific data, they would also study the macro economic factors that affect the company.  Once the financial position of the business is satisfactory, the fundamental analyst would do a process called valuation and based on the results he would proceed to fix a value for the company’s share. This value would be taken as the benchmark for judging whether the stock is undervalued or not. Fundamental analysts believe that when the overall markets decline, fundamentally good stocks also decline below what it’s actually worth giving rise to investment opportunities.

THE PROS AND CONS OF FUNDEMENTAL INVESTING

Fundamental analysis is good for long-term investors – ie, those who are willing to wait patiently for their funds to grow.  This time taken to grow itself is its greatest disadvantage. Its difficult for most of the investors to keep holding on to investments especially when the markets are crashing.

We said it’s difficult- not impossible! A thorough grasp of fundamental analysis can ensure that we stay calm and composed during market volatility.

Fundamental analysis may offer excellent insights, but it can be extraordinarily time- consuming. Analysing a company fundamentally may take a lot of time. So, quick decisions may not be possible. This delay in forming opinions may result in missing favorable chances to buy stocks.

This method’s ability to increase your odds of success for a selected security is greater than other methods. The relationships between financial figures are tested by sound mathematical and statistical methods. Hard and fast financial ratios are laid down by analysts to find how sound a company is.  Those that fail the ratio tests are discarded, while those that pass are perceived as being credible. There is no room for personal predilection or bias. Hence, when you pick a fundamentally good share, your chance of success in investing is also greater.

The usage of mathematical and statistical methods in fundamental analysis also means that considerable amount of data is required to test the significance of variables. Such data are often not easy to acquire. Fundamental analysis also requires a considerable amount of human labor – time and energy.

Great investors like Warren Buffett and John Neff are champions of fundamental analysis. Fundamental analysis can help uncover companies with valuable assets, a strong balance sheet, stable earnings, and staying power.

One of the most obvious, but less tangible, rewards of fundamental analysis is the development of a thorough understanding of the business. After such painstaking research and analysis, an investor will be familiar with the key revenue and profit drivers behind a company. The advantage is that, the investor from there on, would be in a position to quickly grasp the impact of laws, rules and regulations, business agreements and changing business scenario on the share price of the company.

FUNDEMENTAL ANALYSIS – APPROACHES.

There are basically two approaches to fundamental analysis.

  • Top-down approach:
  • Bottoms up approach.

In Top-down approach, an analyst investigates both international and national economic indicators, such as GDP growth rates, energy prices, inflation and interest rates. The search for the best security then trickles down to the analysis of total sales, price levels and foreign competition in a sector in order to identify the best business in the sector.

In the second approach, an analyst starts the search with specific businesses, irrespective of their industry/region.

In short, fundamental analysis is all about analyzing the company to the roots.

You may like these posts:

  1. Technicals vs Fundamentals.
  2. Technical Analysis
  3. Cost Averaging- A strategy you should use carefully.

1 Response to “Stock investing strategy-Fundemental investing”

Mohammed

November 30, 2014 at 11:07 pm

Hi Jins,

I wish if I visit this site in year 2006, i wouldn’t have done the mistakes I did. I had the conviction to hold the stocks I invested, but even in this bull run most of them are under loss even after long 8 years!
may I send you my portfolio for your expert opinion, could you pls share your mail id.

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