“As a general rule the most successful man in life
is the man who has the best information!”
Benjamin Disraeli (1804 -1881)
As the markets keep on calling into question every single portion of your investments, even well-informed investors never stop doubting themselves!
You wonder …
Did I make the right decisions when I bought these stocks?
To answer yourself in any rational fashion, you need to be able to judge whether circumstances, not just psychology, have changed for your holdings.
In times like these, strong fundamental analysis becomes the most important key to your convictions!
Maybe you’ve read about a company that intrigues you, or one of your friends is excited about a particular stock.
Perhaps you keep seeing a stock on various “buy” lists and wonder what makes it so appealing.
Before you decide to buy a stock, you face two key research tasks:
1. Fundamental Analysis:
Examining the company issuing the stock.
2. Technical Analysis:
Evaluating the stock itself.
Both forms of analysis are sometimes needed. You don’t want to buy a stock that looks attractively priced, only to find out that the company is on the skids.
Likewise, you may not want to sink a lot of money into a company that is so popular among investors that its stock has become overpriced.
To further clarify the difference between fundamental analysis and technical analysis, think of the market as an open-air bazaar with stocks as items for sale.
A technical analyst would get into the shopping frenzy with eyes seeking the crowd. He would ignore the goods on sale altogether!
When the technical analyst notices a group gathering in front of the booth selling, say, shirts, he’d scramble over to buy as much inventory as possible, betting that the ensuing demand would push prices higher.
He doesn’t even care what a silk shirt is as long as some greater fool at the back of the line is willing to buy it for more than the technical analyst paid!
The fundamentalist, on the other hand, takes a more sedate approach. The fundamentalist’s eyes would be solely on the products before him.
He would dismiss the other shoppers as an emotional herd of fools who couldn’t tell a good deal if one slapped them in the face. Once the crowd dissipated from the shirt booth, he might casually wander over to examine the merchandise.
Researching a Company!
Fundamental analysis simply means conducting basic research on a company. When analyzing a company, you may want to choose companies that have the following qualities:
A competitive advantage (such as key patents, a dominant share of the market or the fastest growth of new customers in a growing industry).
A record of consistent earnings growth or a strong indication of future growth.
A healthy balance sheet (low debt, strong cash flow).
Substantial ownership by management and, perhaps, recent insider buying.
Strong minority stakes by outside investors.
Conversely, you may want to be wary of companies with:
Substantial and growing competition and low barriers to entry.
A shortfall in earnings, or a possible future impediment to growth, such as new regulations or tax changes.
A weak balance sheet (high debt, declining cash flow).
Low ownership by management and/or insider selling.
Recent resignations of key officers.
Fundamental analysis is a lot more work …
But therein lies its appeal!
Crowd psychology can be a powerful yet fickle force in the markets. You, yes you, as a smart investor, you’ve got to stay constantly alert for when the herd reverses direction!
Fundamental analysis definitely takes time, effort and hard work …
But properly done …
It will most certainly allow you to identify strong companies!