Solving the puzzle 101

Oops...!!! What's new? This Equity Research 101 is as old as gold. What's in it for me? Are you just here to give me some general gyan or what? I know all of these and this post doesn't solve any of my problems.

Yes, I was expecting the same. I wanted you to ask all the above mentioned questions and share the challenges. I know I have shared something that every book on investing says and every stock market expert talks about, however nobody was able to follow this. Not even the experts themselves.

So, what you should do? Lets try to solve this puzzle by untangling each of the threads one by one.

Fundamental Analysis:

It involves analyzing the financial statements, management, competitive advantage, competitors and markets of a business (stock). It is performed on historical and present data but with the goal of making financial forecasts. It is done usually by industry analysts and experts who have been tracking the industry  for many years. It includes the following major analyses -

1. Economic analysis
2. Industry analysis
3. Company analysis

On the basis of these three analyses the intrinsic value of the shares are determined. This is considered as the true value of the share. If the intrinsic value is higher than the market price it is recommended to buy the share. If it is equal to market price, hold the share and if it is less than the market price sell the shares.

This kind of analysis can be done only once in the quarter because its based on the earning reports. Most of the companies report their quarterly earnings and provides a guidance. Effectively fundamental analysis can be done only four times in a year. It requires meetings with senior management, visit to its facilities, meeting with industry chambers and forecasting skills. Even the experts focus on just one industry or one company. Not even top-dogs can focus on multiple industries and companies. Thus, this kind of analysis is very challenging for an individual investor to do and should be done by industry experts and equity analysts.

Now, what should you (as an individual investor) do? Don't try to dig deep in the profit-loss statements and balance sheets of a company. Never try to forecast earnings (EPS) for any stock. Never ever try to time your buy or sell transaction based on any of the fundamental analysis. This is something too sophisticated for you. Then what's the use of fundamental analysis in the life of an ordinary investor. I'll talk about it later in my following posts. Till then - relax and don't do any analysis.