Fundamental Analysis versus Technical Analysis (Part 1)

Fundamental Analysis (FA), is the oldest and the largest school of investments analysis. Benjamin Graham aka “the Father of Fundamental Investing” and his famous disciple, Warren Buffet are the most respected gurus of FA. They introduced the concept of value investing as opposed to speculation, a method adopted by the Technical Analysis (TA) investors.

FA investors usually use the historical data of the stock in order to determine its growth rate and intrinsic value of the business. FA investors must familiarize themselves with the skills in reading beyond the financial statements of the companies to ensure positive growth of their portfolio.

FA investors must have a grasp of the current overall economic health and its likely future as a whole. It is also paramount for the investor to know about the industry in which the business belongs and how the industry is growing. This can be seen by comparing the business which we are interested in with other similar businesses.

The terms earning per share (EPS) ratio, return on equity (ROE), price per earning (PE) ratio, debt to equity ratio, market capitalization, dividend yield and net tangible asset (NTA) value must be known by heart by the investors. Even though these terms can be easily found in the company’s financial statements, the investors must realize its true meaning and its significant to the stock price.

FA investors are aiming for the long term capital appreciation as well as income from the dividend payments. Over time, the return of the investment will be greater thanks to the increment of the stock. One example of FA investment is the Berkshire Hathaway managed by Warren Buffet. The return of this company is around 25% per annum for the last 40 years.

The strategy of FA investors are to buy good stocks when the price is fair, buy more stocks when the price went down and hold as a long term investment. Remember, this exercise can only be done with an extremely good company with exceptional business and sound financial status. If not, investors are advised to set their stop-loss limit at around 30-40% of the investment cost.

I’ll continue with Technical Analysis in the next post.

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