Down to the Basics - How to Apply Fundamental Analysis to Your Stocks Picking Process. Page:   1     2

In the last issue, we examined the broad winning strategies applied by investment pros to score the kind of successes that earn them their high rating. We identified fundamental and technical analysis as two major platforms of analysis for stock selection and investment decision. Because we are intent on our readers' real success in investing, it will be insufficient to stop there. Questions arise as to how these strategies get to brass tacks application in day-to-day use. If they can't be put to work, you obviously won't benefit from them. Hence, the need to logically pursue this evaluation to the practical level of application by the individual investor. That's exactly the essence: make it possible for the reader to apply these strategies that work, so that he stands a strong chance of getting the results that are possible through them. Note, though, that ideas are no use if they are not put into action. It's important, too, to appreciate that success has its price in diligence and hard work. To develop systems to the point that they really begin to benefit you will certainly need your working them deftly and patiently for a period. It's also always possible to avoid the serious work and use rule-of-thumb. Your results may however reflect this. So, today, we will begin a further drill down into stock evaluation strategies to see how to apply them to our stock picking and investing process. Why is all this important? Because stock investing (and other investments too), can make a sharp and huge difference in your financial fortune. That's just a fact!. Perhaps, this short, real life story (forgive me, not a Nigerian example) will help.

Destiny, Foresight or Calculated Risk?
The story of the Angles - Carol and William, both American medical doctors - is quite inspiring. They are also representative of a group of people that had the courage and good sense to act when a investment opportunity was presented to them many years ago. Their wealth, today, came form that investment action, not really from medical practice. How was this? As young doctors then, they listened to the presentation by a young, budding investment manager (now called 'The Oracle of Omaha': Mr Warren Buffett). He convinced them about his investment proposition and they went on to invest through him. They are believed to have plugged in $10,000 each, with Carol increasing subsequently to $30,000. The success of the manager has been legendary and that investment grew rapidly. Forbes estimated the family's (the Angles) holding in Berkshire Hathaway (run by Buffett) at $300 million by 1998, when the share was in the $60,000 per share region. Today, that stock has shot up to the $110,000 per unit mark. So do the math and estimate the current value of that holding. Just from the little seed sown. Today, the Angles can age with grace and comfort. Now, isn't that what we all really want? Put they took action!

Going Fundamental
So, you can see why this investment matter is worth some trouble? A little of it you get right can make a lot of difference. I think that gives us the fuel to delve into fundamental analysis, for today. Given that the subject is wide, we can only take measured steps. Here, we will examine the basic application of fundamental analysis, to answer the question 'how do I use it?'.

You Invest for Value
Fundamental analysis is believed to be the bedrock of serious investing. While other techniques have proved successful, it's difficult to think of a key market operator who totally ignores fundamental analysis. And this is because the health and performance potentials of a company - the focus of fundamental analysis - will ultimately determine how well its stock will do. Fundamental analysis goes beyond current market sentiment to probe into the internal strengths and weaknesses of companies and to guage what promise these hold for future valuation of the stock. They look for hidden treasures in value that is locked up in future performance potentials, yet not manifested to the market. In effect, fundamental analysts are value investors who target companies that are priced below their intrinsic worth or value. Their expectation is that the market, sooner or later, will discover this error and re-price the stock to the true value. This means price appreciation and profit for the investor. Growth investors who look out for companies that offer significant growth potentials (even if current performance is deficient), also engage fundamental analysis.

What variables do you look at and how do you determine the inherent worth of the stock? By examining the company's fundamentals. This, however, is the crux. A serious analysis of a company, of the type that should be the basis of this investment decision, requires some bit of rigour and skill. The good news: there are investment advisers and fund managers who can always do the odd job if you can't. It is also possible to aid the process with analysis software. Such evaluation will beam at two broad areas: quantitative factors and qualitative variables.

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