Stock Market Analysis

This article is a temporary respite from innovative ways to invest. It deals with traditional approaches to stock market analysis, specifically fundamental and technical analysis.

The treatment is brief and likely should have come earlier in this series.

One of these methods is rejected as having value for the average investor. The other may be of some value.

Fundamental Analysis

Fundamental analysis focuses on economic variables to ascertain the value of a company. Financial statements, future earnings prospects, new product development, changes in management and a host of other company-centric issues are looked at. So too are more global issues (macroeconomic expectations, industry trends, political events, legal threats, competitor actions, and geopolitical events for example).

The approach is conceptually sound. It’s is based on the notion that all value/prices should reflect the present value of expected future cash flows. This approach to stock analysis was popularized by Benjamin Graham, considered the Father of Value Investing. It has many other supporters, including Warren Buffett.

Conceptually the approach is unassailable. But theoretical perfection does not necessarily lead to practical value. In this case, it does not, at least for the average investor.

To benefit from fundamental analysis you must:

  1. Have early access to information.
  2. Be able to interpret that information properly.
  3. Be able to act on the information before others do

The average investor is unable to do these things as well as the seasoned pro who devotes 40 – 60 hrs. per week to the task. It is not a matter of intelligence. It is an issue of resources and timing. The pro has better access to information. He has more computer power to process it. And his job requires him to do so.

The average investor must focus on a job not directed at markets. He comes home at 6 PM, tired from the workday. By the time he gets around to looking at markets, the pro is on his second martini or perhaps has retired for the evening.

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