Fundamental Versus Technical Analysis
The stock market in its current state represents a seemingly dangerous place in which to stake one’s future. News of massive bank failures awakened new fears in both institutional and individual investors as evidenced by the recent collapse of the financial markets. To most investors, recent trends indicate a significant loss of capital in the short term. The challenge for all is to look to the long term and successfully choose to invest or trade in the companies that will outlast the current downtrend and emerge as solid performers when the market eventually reverses. The question this discussion will focus on is whether a fundamental analysis of three individual companies, Walt Disney Co, eBay Inc., and Costco Wholesale is the proper method, or if a technical analysis will yield the greatest chance of success in future investments. Few doubt that the market will rebound, but which companies will remain standing in the end is yet to be determined. The debate of fundamental versus technical analysis has gone on for nearly one hundred years. Fundamentalists argue that the only way to predict the future performance of a company is to carefully examine its current financial state of operations through detailed analysis of its financial statements. The goal of this analysis combined with the industry outlook is to determine a fair market value for the security. If the stock trades below this value, then it should be bought, if it trades above this value, then it should be sold. Fundamental analysts choose to neglect short term fluctuations in favor of long term appreciation. An example of the classic fundamental investor would be Warren Buffet who seeks to invest in companies with a strong balance sheet and a durable competitive advantage. The fundamentalist doesn’t concern themselves with the historical stock price; rather they take a snapshot of the company as it relates to its ability to handle its current business and ability to generate growth in the future. The goal is to search out companies that have been undervalued by the market and buy them before the market does. For the individual investor, fundamental analysis is relatively easy to perform and monitor. Price to earnings ratios for each company are available quickly at websites such as Yahoo Finance and Google Finance. In addition, the specific company’s website will publish the balance sheet, income statement and cash flow statements as well. The fundamental investor seeks a long term investment in a company that will transcend short term market fluctuations and provide consistent returns in the future. They realize that changes in management and industry trends will take some time to manifest themselves in the stock price and have the basic mindset that not every stock is fairly priced each day. The simplicity of the online tools available today lies in the fact that an investor doesn’t necessarily have to understand everything about a company’s financial statements to compare them to their peers. An investor could simply compare the P/E ratio of Costco for example at 18 to its peers such as Wal-Mart at 15.2 This gives a very quick snapshot of how Costco is valued compared to its peers and the market as a whole. A company with a low P/E ratio within its peer group with a positive industry outlook should outperform its peers. Much of the fundamental analysis is focused on metrics such as price to earnings, earnings per share, and debt to income ratio that can be easily compared to other companies or other industries. The reasons why low debt to income is good and low price to earnings is good are largely intuitive. In fact, the access to the internet and information sources, such as investopedia, allows individuals to learn easily about the basics of fundamental investing. In addition, for investors who hold accounts with a major brokerage house such as Fidelity, the company provides free and...
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