Basics of Investment Research: Fundamental Analysis, Technical Analysis.

Researching Business Vs Stock

A few years back I met with a bike accident. I had tremendous pain in my ankle joint so my friend took me to a nearby orthopedic clinic. I also had some blood loss which got me unconscious. I woke up the next morning with a plaster on my leg. My father was sitting next to me, I asked him about reports and said there is a hairline fracture in bone of a little finger. "But, the pain is in the joint", I said. I made the doctors re-evaluate the things to find out that there was a big tear in my ligament. The Doctor who was hesitant to cut off the plaster for re-evaluation said, "If we had kept that plaster without stitching these ligaments it would have never recovered. Thank God!" 

This is similar to analyzing a business just as stock and similar things will happen if we research a business just as stock. A stock can be of commodities, currencies, or business. So dealing with a stock of business just as stock can be detrimental to your wealth. Make sure to analyze a business as a business first, then we can look at its market aspects as stock.

In short select a business you want to invest in by fundamental analysis first. Once you are sure about buying the business then you can go ahead with technical analysis for analyzing stock to make sure you are buying it at the right price and right timing.  

I know there are many market gurus who keep promoting only a single form of analysis but with my experience, I assure both methods work really well together.

Fundamental Analysis

Whenever I ask newcomers about fundamental analysis, most of then talk about analyzing a company's financial statements such as P&L, cash flow, and balance sheet statements. I agree it is one of the important parts of fundamental analysis but still, it is a very small part. I probably dedicate only 20% of the time looking at the financial statements rest 80% is spent on other parts of fundamental analysis.

So what does a complete fundamental analysis consists of:

• Economic Analysis

1. Macro Economy Analysis
2. Micro Economy Analysis

• Industry Analysis

• Company Analysis

1. Qualitative analysis
2. Quantitative Analysis(Analysis of Financial Statements) 

 As you see fundamental analysis is a big concept and will require a dedicated series of articles so we cannot discuss it here. But be assured I am coming up with a dedicated series of articles to help you understand fundamental analysis. After understanding and practicing it you will not find it hard rather enjoy it.

Technical Analysis

Once you have selected a good company with great fundamentals at the right valuation next step is to buy that stock, right? No, because the market has, again and again, proved that valuations of a company may keep getting cheaper and cheaper during market falls and costlier during the rise. 

Why this happens? Neither because of fundamentals nor because of technicals. It happens because of human emotions and behavior. A lot of people claim that some price movement is happening because of technical reason but in reality, technicals do not cause price movement rather human emotions and behavior cause it. 

Then why should we do the technical analysis? 

You may have heard value investors saying, "Be patient, the market will find true worth of the business." Now being patient is okay and necessary to profit from the stock market but, how long? Is it worth waiting for ten years when the value of your investment is not rising and inflation is at the peak? One may argue it doesn't take 10 years for value unlocking and I partially agree with him because no one can guess how long would it take. The best performance can be achieved when one enters into an investment at the right time and only technical analysis has the answer for when to buy.       

Technical analysis is a way of studying price charts to interpret human emotions and their possible reactions. In simple words, technical analysis of price charts can tell you when market has started finding the value in the business so you won't have to wait for years.

Now going deep into the technical analysis will also take long discussions so I will come up with a separate series of articles on technical analysis. There we will not just discuss entries but exits as well because exits are as important as entries.

For now, I hope you understood the basics of research if you have any query please feel free to comment.

And don't forget to READ TO LEARN INVESTING.