Individuality is reflected through the uniqueness of mind and soul that every person depicts. Every person is created unique and has his/her own perspective to look at things and disburse the hard earned. Human psyche is such that investment satisfaction is achieved only through individual strategies. Some believe in hot or quick money while some believe in slow, steady and quality income. Some believe in long term while some want to make their buck and move ahead. This is where fundamental analysis and technical analysis, the two different approaches to stock and equity analysis, plays a role.
Fundamental and technical analyses are two different stock investment strategies used for researching and forecasting the future growth trends of stocks. Fundamental analysis attempts to calculate the intrinsic value of a stock using data such as revenue, expenses, growth prospects and the competitive landscape, on the other hand Technical analysis uses past market activity and stock price trends to predict activity in the future. A Fundamentalist tries to predict value of the stock while a chartist doesn’t care a bit about value, the interest lies only in the price movements in the market.
Difference between fundamental and technical analysis:
Calculating the intrinsic value of a stock using economic and individual factors
Past price movements used to predict the future prices
Future price to trade
All about Fundamental Analysis:
What is Fundamental Analysis:
Fundamental analysis involves the study of the underlying forces that affect the economy, industry and hence the companies. At the economy level (Economic Analysis) one studies the economic data to assess the present and future growth of the economy. Supply demand scenario is studied through the industry data (Industry Analysis). A combination of these along with the study of the financial data, management and business concepts of the company (Company Analysis) form the basis of fundamental analysis. These help in calculating the intrinsic value of any stock. Thereby, fundamental analysis, studies all that can affect the intrinsic value of a stock, be it macro economic factors or individual specific factors.
Positives of Fundamental Analysis:
A) Long term trends: Long term trends can be studied for long term investments. The right industry, group or company can be analyzed through the study of long term economic, demographic and consumer trends.
B) Value picks: Sound fundamental analysis helps in identifying the companies that represent good value and returns.
C) Business insight: the hard core research that is done to understand the business under focus provides the key revenue and profit triggers to the investors. This also gives an understanding of what not to pick.
Negatives of Fundamental Analysis:
Like two sides of the coin, every investment strategy has its own pros and cons. Although the positives of fundamental analysis are strongly considered by the believers, one cannot ignore the negatives. Reading someone else’s research and blindly following it is wrong. There are umpteen research reports on various companies, but one should not blindly follow them as they could also be biased. Ultimately it is a human creation. There is no harm in reading different reports, but that should be done to add to our knowledge and develop the skills to weed out the important and relevant information and ignore the hype.
The stock under reference is TTK Healthcare. This company has gradually shown strength to strength capturing the niche market of medical devices. It has a sound management with a vision of growth for the company and the investments of its investors. With a growth CAGR of 13% and 8% in the last five years in the revenues and profits respectively, the stock price has equally increased from Rs65 levels to Rs1000 levels.
Gradual increase in net sales:
Example from the MNC basket:
ITD Cementation is another example of a strong fundamental pick from the MNC basket. The parent company of ITD Cementation India is Italian-Thai Development Public Company Limited (ITD) engaged in the business of civil engineering and infrastructure construction and development and has been a major builder of Thailand’s infrastructure for over 50 years. It holds around 52% of the Indian arm. We are going to see a strong push for the infrastructure growth in the economy in order to be able to achieve higher GDP growth. This company shall and already is a major contributor to the infrastructure story in India.
All about Technical Analysis
What is Technical Analysis:
The contradictory method to fundamental analysis for security analysis is technical analysis, where the price of the stock depends on the supply and demand in the market, having little correlation with intrinsic value. All the financial data and market information is factored into the stock price. Technical Analysis is the study of the markets and the technical characteristics, identifying patterns and trends, ultimately to predict the future price of the stocks.
Tools of Technical Analysis:
- Price: Changes in the stock prices are reflected in the demand and supply of the securities
- Time: As the movement in stock prices is a function of time, longer it takes for a trend to reverse, greater is the price change
- Width: The extent to which the price changes have taken place can be seen through the width of the market
- Volume: The intensity of the price change of a stock is reflected in the volumes of the transaction
The basic principle of technical analysis comes from the Dow Theory, proposed by Charles Dow in 1900. According to Charles Dow “The market is always considered as having three movements, all going at the same time. The first is the narrow movement from day to day. Thesecond is the short swing, running from two weeks to a month or more and the third is the main movement, covering at least four years in its duration”.
Basics terms of Technical Analysis:
Charting: Charting is the basic tool in technical analysis, providing visual assistance in reflecting changing pattern of stock price behavior. The types of charts are namely Line, Bar and Point and figure chart.
Trends: A trend defines the direction in which the market is moving. This could be upward, downward or sideways trend.
Resistant & Support levels: The peak price of the stock is called the resistance area. Support levelshows the previous low price of the stock.
Assumptions in Technical Analysis:
Art over Science: Technical Analysis is an art of reading charts, as same chart can have different answers derived. It is unlike other investment approaches that require rigorous math workings to arrive to investment opportunities.
Focused approach: Rather than trying to find out the reasons why events happen in the market, technical analysis takes the route of reading the past and interpolate its effect in the future.
History repeats itself: Technical analysis is based on the fact that set patterns in the historical do repeat themselves over long periods. These patterns can be advantageous in predicting the future trends.
Trends reverse: A promising trade can reverse if it is crowded, with the exits becoming difficult with unexpected surprises. Also if too many people see the same pattern and take actions, that forces the prediction to happen and exits become difficult.
Example of Technical Analysis:
The below mentioned chart is of the company Reliance Industries. The street has been quite bullish on the company on technical readings. There has been a lot of activity happening in this counter. The chart itself clearly indicates the uptrend in the stock. The upward movement across the defined time horizon shows the technical strength in the company.
Fundamental Analysis vs. Technical Analysis
The two examples below clearly indicate the psyche of an investor, strength in fundamentals and technical.
- Engineers India is the company that looks weak fundamentally atleast for the next one year with none of the aspects qualifying to be a value pick currently. However, when been seen technically it appears will do wonders for those who will trade in it. The conviction in the reading of past prices and trends will give returns to those who take the risk.
On the other hand, FDC is the company that is strong fundamentally to be a multi-bagger but lacking the technical trend as of now.
Thus, the two examples clearly depict the two different investment strategies that worked for those who believed in it. Like any investment strategy or philosophy, both have their advocates and adversaries.
Although one may consider the strategy of choice, the fact remains that smart investors are those who try to do techno-fundamental combination analysis while investing. This strategy is sure to give them better and faster returns than doing fundamental and technical analysis separately.
Related links you will like:
Investing in the right company