Stockology

Fundamental analysis and technical analysis. These are two terms that you might hear today far less frequent than you might have maybe a decade ago. The reason is that most investors today take a hybrid approach of combining both fundamental and technical analyses when making investment decisions.

That said, it’s still important to know what the heck they are. First, know that no matter which method you use, the name of the game is to predict a stock’s value.

Fundamental analysis is evaluating financial statements, macroeconomic trends, industry trends, management competence, and some others I can’t think of right now, to try and value a stock. This is the more old-school method of valuation analysis. Typically, it involves a lot of reading, and quantitative and qualitative analysis. It means knowing what the company does, downloading a company’s quarterly and annual reports and pouring over those, keeping abreast of news to keep informed on industry and macroeconomic trends, and listening in on conference calls to see if you agree with the direction the management is leading the company.

Basically it’s a lot of work. Necessary work. When you hear people say, “I did my homework on this stock,” it means they conducted fundamental analysis on the company. 

The newer school of thought is technical analysis. Technical analysts believe past performance of a stock is indicative of future price performance. Basically, technical analysis uses charts to identify patterns, then tries to use these patterns to determine what will happen. In more detail: Volume and a gamut of oscillators are used to help in the analysis. These include, but are not limited to, moving averages, relative strength indices, stochastics, bollinger bands, and a whole bunch of others. It’s impossible to cover all of these because 1) there are just too many, and 2) I don’t know all of them. But I will try to go over a few of them in Part 2.

On a side note, one of my lifetime goals is to get in a time machine, travel to the future, and pick up a stock almanac (kind of like Biff with his sports almanac in Back to the Future). Then I’ll be the founder of “Almanac Analysis,” where all you do is buy the stock you already know is going to go up. Simple, no?

Moving on…

It used to be fundamental analysts hated technical analysts. The two groups were always arguing over whose method of valuation was better. Fundamental analysts thought it was a joke to look at some charts and decide whether or not a stock was going to go up or down. Technical analysts, on the other hand, believed that “charts don’t lie.” They think all the news, past performance, future earnings projects, and everything else, is already factored into the price of a stock. Obviously, arguments can be made for either side.

I mentioned earlier that these days, most investors take a hybrid approach to investing. Part of it is being more informed. Think about it this way. If a whole lot of people are making investment decisions based on studying a company’s financials, industry, etc. and knowing it inside out, wouldn’t it be pretty prudent to know why they do that and maybe taking a look at those things yourself? And vice versa. If a whole lot of people are making investment decisions based on looking at a chart and some squiggly lines, (aside from it being intriguing) wouldn’t you want to know what they’re up to?

The overall investing community has also done a good job of fostering both methods. You won’t find a financial website that doesn’t have both financial statements and charts. Likewise, any brokerage you open an account with will provide both research tools (typically refers to fundamentals research), and charting tools. For now, just know that the two exist.