Fundamental Analysis

Instead of posting just technical analysis , i Had decided add posting of Fundamental Analysis (FA) into my blog.

Introduction

Generally , People who trade stocks are generally divided into 2 school of thoughts

1. People whom used Technical Analysis (TA) to decide entry and exit price. TA have the following 3 assumptions:
   -->
   Efficient-market hypothesis (EMH) stated that everything
   relevant to the value of a company's stock is discounted and reflected in share price.
   -->
   Trends sometimes appear in share price moves and when once
   started, these trends tend to continue.
   -->
   History in the market repeats itself. Majority of these TA indicators are statistically inclined.
   These people usually trade shorter term , weeks , days and even by minutes with the help of technology. Names given to this school of thoughts are speculators, day-traders , swing traders and even gamblers.
   Examples of TA indicators: Moving Average (simple and expotential),stochastic,macd , RSI and drawing trendlines etc...




2. People whom used Fundamental Analysis (FA) , irregardless of from a bottom-up or top-down approach, read balance sheet, cash flow statement and income statement in financial statements to analyze it to see if that firm is undervalue.
   If it is undervalue , the investor will see it as a bargin and buy it and wait the price to go up to a price they seems it to be fair valued or over valued before selling it.
   The person whom is famous in doing this is Warren Buffett.
   Examples of FA analysis: Price to Earning Ratio , Price to Sales Ratio , Price to Book Value, Price to FCFE , Dividend Yield , reading into revenue , gross profit and net profit etc...

Why are they divided into these 2 schools ?? We shall look at the pros and cons of both of them.

TA Vs FA

TA:

1. It is less time consuming as compared to FA.
2. Stocks will never be undervalue due to EMH.
3. TA only relied only in charts and indicators , whom investors see it as gambling . They dont even need to care to know what business it is in , do they have cash flow problem and whether they are going bankrupt tomorrow.

FA:

1. There is a systematic approach in doing FA and is more logical than TA which relies only in charts and indicators.
2. Doing FA will require the analyst to understand the company more and therefore will have more confident after investing.
3. There might be chance that the numbers in the annual reports are being manipulated. Window Dressing is another term and is widely used by companies to beef up their quarterly / annual reports. Therefore when this happened , there is no point doing FAs.
4. Doing FA will need the analyst to forward look the company and project their revenue , growth and profit etc... This is very difficult to project and will lead to inaccurate valuation of a company.

So....Have you identify which class are you in ??? For me....

I am a hybrid of them.... FA will always come first... Usually i will take keep a look out for fundmentally sound companies , which is usually in STI and MSCI SG. When their price drop....i will do TA to decide the entry , exit and cut loss price.... Usually i will only go long as i dont like to chase stock even if i missed the chance . I would rather wait for it to retrace before buying