Fundamental Analysis Can Greatly Increase Your Stock Picking
Profits
Fundamental analysis is one of the most often overlooked
techniques of stock picking. Many investors eschew fundamental
analysis in favor of the flashier technical analysis made so
famous by chartists over the years. Stock market charts are now
animated wonders, so who doesn't love looking at them,
especially since it's a lot easier than actually pouring through
SEC statements adding up the numbers. But fundamental analysis
never really completely goes out of style, because many of
history's greatest investors, such as the greatest of all,
Warren Buffett have practiced fundamental analysis as strictly
as a devout person practices religion.
The reason great investors believe in fundamental analysis is
because it's a great model of how things work. Companies report
on financial operations that are best explained by numbers.
Analysing the numbers rigorously, and placing personalities
aside, gives a stock analyst the chance to really get a feel for
how the company is doing. Why listen to hyped up PR statements
when you can clearly see what a company really did, as reported
by them in their statement of operations. The true story of
operations will always flow to the bottom line, and a gifted
fundamental analyst will seize this information like a pit bull
devouring a piece of prime rib. In other words, he'll dig in and
research the true performance of the company as told in numbers.
The general definition of fundamental analysis is the use of
research tools to study the basic financial information released
by a publicly traded company. All exchange listed companies are
required to do financial reporting, and these reports are
available to the public for analysis. Most short term price
movements of stocks do not happen for fundamental reasons, but
generally happen because of human sentiment. The amount of
influence of the media on share prices can be quite dramatic,
and many times stocks will swing wildy based on rumors that are
circulating. Fundamental analysis assumes that despite these
fluctuations, the company has an instrinsic value that can be
determined mathematically and exists independent of the crowd's
herd mentality. If you can correctly identify that price, you
can make a huge profit on the difference between what the public
thinks the company is worth now and what you know the company to
be worth. You can buy at a discount and sell the shares when
they get to their true value. In essence, this is the trading
system that made Buffett the second richest man on the planet.
Learning fundamental analysis is not an easy subject, but it's
not rocket science either. Once you have grasped a good
familiarity with the terms, you'll be pleased to learn that
companies report the data in a uniform matter. After you become
proficient at technical analysis you'll be able to read complex
financial information like a Frenchman reads French. You are now
proficient in speaking the language of business, numbers, and
now the numbers will tell you the truth behind the glossy press
releases and the flowery conference calls. Armed with the story
told by the numbers you can rest assured your investment
decision is on solid ground.