Monday, August 3, 2009
There are many opinions about which is better of the two schools of stock investment, namely: fundamental and technical analysis. In our opinion, however, the proof is in the pudding; the world's richest man made his money through fundamental analysis. Technical analysis always has an unchanging percentage of luck as a factor of your success; technical analysis can be compared to a game of poker. While some skill is needed, luck is a major factor, too. Fundamental analysis, however, can either have luck play a large amount or a small amount. Fundamental analysis can eradicate almost completely the part that luck plays.
Fundamental and technical analysis are both good for different things. Technical analysis, while it may be useful for short term trading, is not good for long term investment. Fundamental analysis, while it excels in long term investment, is not good for short term trading. Technical analysis deals with charts, which deal with patterns. Patterns are impossible to predict over a long period of time, so technical analysis is useful only in the short term. However, fundamental analysis deals with the overall potential of a company, so it is more useful for the long term; with fundamental analysis, one can invest in very long term ventures, such as ten or twenty years. In fact, fundamental analysis works best this way.
Fundamental analysis is the other school of stock investment. A fundamental analyst will not examine the charts of trends, because he or she does not care about the trends. He or she cares about the company behind the stock. A fundamental analyst will examine the financial statements, or financial records, of the company. He or she might also take a solid look at the company's management to see if the company is being run effectively or not. A fundamental analyst also pays attention to other, qualitative (non-quantitative) factors such as geographic location, the industry the company is in, the appeal of the product, etc. Fundamental analysts try to predict the future of the stock's price by trying to predict the future of the company in question.
Technical analysis is the study of trends. A technical analyst will examine charts and try to predict the future based on different patterns he or she sees in the charts. The charts themselves are records of the price of the stock in question. There are many different patterns that people associate with certain trends, and they are thought to generally to be precursors to other trends. These trends are the result of emotion and are not always accurate. For example, the pet rock fad boosted one company's stock up to ludicrously high levels, but it never recovered back to that point. Any patterns showing that it would bounce back up were clearly wrong. People's emotions are what makes the stock go up or down.
There are two main schools of stock investment: technical and fundamental analysis. Technical and fundamental analysis differ from each other greatly in that they are completely different ways of analyzing stock. Technical analysis deals with charts and trends, while fundamental analysis deals with facts such as financial statements, management, and geographical location of the business. Technical analysis is generally better for short term, while fundamental analysis is more appropriate for the long term. It must be noted that the world's richest investor is a practitioner of fundamental analysis. He himself advocates fundamental analysis, and he thinks technical analysis is silly. We will go into more detail about fundamental and technical analysis throughout this blog.
Stock is arguably one of the best ways to make money. A stock is a piece of ownership in a company. The idea is to get a piece of stock while it is cheap and sell it later while it is more expensive. Or, to get a piece of stock while it is cheap and hold on to it forever, collecting the income it gives off; some stocks give off income known as dividends. Stock can be the fastest way to create or lose wealth, as its price is solely determined by what people think it should cost. When the economy is good, people think stock should be worth a lot of money, so it is. When the economy is bad, people are scared of stock, so the price is very low. The idea is to go against the crowd and buy when everyone else is scared so that you are buying at cheap prices.