All About Fundamental Analysis

Remember there is no perfect timing for anything, there is only now!

This is one of my favorite quotes, especially if you are in the leaning process of investing or trading. 

During my Trading Journey, understanding Fundamental Analysis played a very important role in predicting future price moments with accuracy and identifying some key prospects.
A comprehensive study on a business is called Fundamental Analysis (FA). This becomes crucial for an investor who wishes to invest in a business for the long term (3 – 5 years or sometimes even more than that).

Fundamental Analysis helps understand the company's business from various perspectives.

What is Fundamental Analysis?

Fundamental analysis is a method of evaluating the intrinsic value of a stock (or asset) and analyzing the factors that could influence its price in the future. 

This form of analysis is based on external events and influences, as well as financial statements and industry trends.

Fundamental analysis is one of two major methods of market analysis, with the other being technical analysis. 

Fundamentally analyzing the stock is simply looking at factors outside the price moments.

How can FA help an investor?

Applying FA on stock or share of a radically strong company tends to appreciate, thereby creating wealth for its investors.

Now that we have understood FA, let's see how is it applied! 

There are various tools and techniques that can be used for fundamental analysis, they are further categorized into approaches: top-down analysis and bottom-up analysis. 

Top-down analysis takes a broader view of the economy, starting with the entire market before narrowing down into a sector, industry and finally a specific company. 

Conversely, bottom-up analysis starts with a specific stock and widens out to consider all the factors that impact its price.
Here are long term charts some renowned companies in Nifty50 that can set you thinking about long term wealth creation. Do remember these are just few examples amongst the many that you may find in Indian markets.

Above were the charts of stocks with great intrinsic values and good prospects.
Given below are chats that have proved to be totally wealth destructors in the long run.

Now that you have understood not every stock is worth investing, over agenda is to separate out the wealth creators from the wealth destructors.

How can this be done?

We need to understand that these stocks carry some characteristics and attribute in common, likewise, all wealth destructors have a few common traits which is clearly visible to sharp investor.

Fundamental Analysis is the technique that gives you the conviction to invest for the long term by helping you identify these attributes of wealth creating companies.

Requirements for Fundamental Analysis

It is a common misconception among people that only chartered accountants and professionals from commerce background can be good fundamental analysts. This is not true at all. I'm an Electronics and Telecommunication Engineer, already broke the myth!

Anyone can start with Fundamental Analysis of their own, Ofcourse you will need a few basic skills:

1. Understanding the basic financial statements 
     (If you don't know how to start, chill, just keep a track on my posts!)

2. Understand the company's businesses (Simple?)

3. Need to know basic arithmetic operations

Our agenda of this module on Fundamental Analysis is to ensure that you gain the first two skill sets.

Wait I know Technical Analysis, then why Fundamental Analysis?

Technical Analysis (TA) gives a better perspective on entering and exiting the market. It helps to reap short team returns.

However, TA is not an effective approach to create wealth. Wealth is created only by making intelligent long term investments. However, both TA & FA must coexist in your market strategy. 

Then why should you consider TA if it's not that effective?

We need to keep in mind that in, the market is not predictable, in the past few months we have witnessed the worst volatility of the market, there have been stock portfolios which were at an expected good value but since the market was rattled in a matter of days the entire portfolio was turned to scrap again. 

And therefore timing the market becomes necessary and hence Technical Analysis.

To give you an example let me reproduce the chart of IndusInd Bank.

Special Highlight (This my personal example)
Let us say a market participant identifies an opportunity in IndusInd Bank as a fundamentally strong stock to invest and therefore invests his money in the stock in the year 2015. 

As you can see the stock made a relatively satisfying move between 2016 and 2018. The returns were quite meaningful. The market participant would have been better off taking short term trades during this time. 

Technical Analysis helps the investor in taking short term trading bets. Hence both TA & FA should coexist as a part of your market strategy. 

In fact, this leads us to an important capital allocation strategy called “The Core Satellite Strategy”.

Tools for Fundamental Analysis

The tools required for fundamental analysis are extremely basic, most of which are available for free. Specifically, you would need the following:
1. Access to the news – Daily News helps you stay updated on the latest happenings both in the industry and the company you are interested in. 

2. Annual report of the company – All the information that you need for FA is available in the annual report. You can download the annual report from the company’s website for free

3. Industry related data – You will need industry data to see how the company under consideration is performing with respect to the industry. Basic data is available for free and is usually published in the industry’s association website

4. MS Excel – MS Excel can be extremely helpful in fundamental calculations

With just these four tools, one can develop a fundamental analysis which can prove completely insightful. 

You can believe me when I say that you don’t need any other tool to do good fundamental research. 

Much more to go with ........Stay tuned post on 'Mindset of Investor' very soon.....

Until next time...

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