Using Fundamental Analysis

Fundamental analysis is a very reliable method of investing in every financial asset class. Fundamental analysts focus on information and macroeconomic factors that are affecting the true value of financial security. This information may include both internal and external factors as mentioned below.

The Goals of Fundamental Analysis

The main goal of a fundamentalist is to trace and trade financial securities that are priced below their fair market value. Fundamental analysis is focusing on estimating the fair value of targeted financial security. Another important task for a fundamentalist is to identify and measure the potential risk of each investment decision. Risk identification is essential for managing your portfolio in an efficient and effective way. These are the main goals of fundamental analysis:

(1) Determine Fair Value of security (profit potential estimation)
(2) Identify and measure risk incorporated (loss potential estimation)

Fundamentals are based on internal and external factors affecting investment. For example, if you buy a US stock you must be aware of the company’s balance sheet but also be aware of US economic figures and especially about the corresponding industry figures.

Read more: Basics of Fundamental Analysis

“The Art of War” is an influential strategy text studied by corporate strategists and CEOs all over the world. Business is war after all..!

Who was Sun Tzu

Sun Tzu (孫子;) was a Chinese military general and philosopher who lived during the Eastern Zhou period (771–256 BC). The name Sun Tzu means "Master Sun".

He became famous for writing the book “The Art of War” (5th century BC). This book has a significant influence on both Eastern and Western thought. Sun Tzu focused on asymmetrical warfare which means attacking your enemy only if the enemy will not have the opportunity to defend or counterattack.

Read more: "The Art of War" by Sun Tzu

Major Methods for Investment Valuation

Being able to evaluate a company's true value is very important in making profitable stock-market investment decisions. In this article, the most important evaluating methods are investigated. Here are the five most important evaluating methods:

1. Revenue Valuation

2. Earnings Valuation

3. Cash-Flow Valuation

4. Equity Valuation

5. Empirical-based Valuation

1) Revenue-Based Valuations (reliability 4/10)

In general, the total revenue of a company is generated by selling goods and services. The high revenue of a company indicates a strong competitive position. If you want to compare the revenue of a company to its market value you may use the Price / Sales ratio.

P/S Ratio = Share Price / Sales per Share (annual sales)

Depending on the industry and the company’s growth rate Price to Sales ratio may take values from 0.2 to 10 or even 50. Price to Sales at 0.2 is common for technology stocks that spend heavily on research. On the other hand Price to Sales 50 can be traced to industries with very low growth rates and historically low net profit margins. This method of evaluating stocks should be used mainly for newcomers in high-growth industries.

Read more: Investment Valuation Methods

Philosophy and Famous Quotes

Take a moment and read these quotes

How can a trader get a benefit from Philosophy? If you want to be a great trader you must first become a great man, and philosophy may take you there.

Socrates was a classical Athenian philosopher credited as the first moral philosopher and one of the founders of Western philosophy.

Socrates {469-399 BC} “What Defines an Educated Man”

 When sometime Socrates was asked to define the educated man, he did not mention anything about the accumulation of knowledge, instead, he defined the educated man as:

1. The one who can control unpleasant situations rather than be controlled by them

2. The one who can face all situations in his life with courage and logic

3. The one who is honest in all his transactions

Read more: Best of Socrates

TEN (10) SOURCES OF INVESTMENT RISK

Portfolio risk may adversely affect future cash-flows of an investment and even lead to a total loss of the initial capital. There are two major categories and ten individual sources of investment risk.

Investment risk is divided into two major categories: systematic risk and non-systematic risk as described in the (I) section.

(I) General Categories of Risk Separated by their Fundamental Nature

In order to deal with the investment risk first, we must identify its origin. In that way, we distinguish risk into two general categories: systematic and non-systematic risk. Systematic risk is unpredictable, and therefore, it can not be identified and managed. This category includes risk deriving from events in the overall macroeconomic environment. The worst-case scenarios include war and the nationalization of local companies by the force of state law.

In contrast, non-systematic risk can be anticipated through the implementation of a series of risk diversification techniques. The non-systematic risk can be mainly managed through a process called diversification of risk. The concept of that technique can be captured in the phrase "Do not put all your eggs in one basket". Risk diversification procedures are extremely important in every investment portfolio -especially to those investment portfolios heavily exposed to financial securities like corporate bonds and stock equities.

Read more: investment Risks

The Apology of a Madman – Democritus

In about 400 BC, Hippocrates, a famous ancient therapist was asked to examine the great scientist Democritus because there were complaints about him that he did not behave normally and laughed strangely whenever he met people. Hippocrates imposes questions as he tries to explain Democritus' strange behavior.

Below is a part of this 'examination'

Hippocrates:

“Tell me, Democritus, in the name of the Gods, is everyone sick without knowing it? Can’t they go for treatment as everyone is sick, and nothing else exists beyond them?”

Democritus:

“There are infinite worlds Hippocrates and don’t consider little and limited our Nature which is actually so rich.”

Read more: Democritus -The Apology of a Madman