Investing in the Stock Market is one of the best ways, if not the best, to make some serious money. But the investing world seems to be divided regarding the Analysis of Stocks. Some people stick with the old and conventional “Technical Analysis,” while others rely on “Fundamental Analysis” to analyze stocks.
Well, it’s pretty much like the Republicans versus the Democrats. Still, this time it’s “Charles Dow” versus the legendary Warren Buffett. Both sides have Pros and Cons, but let us break down these approaches and see what it’s like.
Why is Fundamental And Technical Analysis Important?
When selecting and analyzing stocks, the investing Community seems to be divided among the two popular approaches known as “Technical and Fundamental Analysis.” You won’t buy a car without going through and researching its features, price, as well as technical endurance. Similarly, when you go looking for a good house for you and your family to live in, you must go through multiple complications before You can conclude.
When you think the price of a house or a car varies concerning its actual value, you’re using the “Fundamental Analysis.” Whereas if you believe that the asking cost at the home is well accounted for with its real value. Or the actual price and the asking price are close to each other; the same holds for “Stock Analysis.“
Example Of Fundamental Vs Technical Analysis
Imagine that we have two Financial Analysts, namely “Eric,” who is more of a “Fundamental Analyst,” and “Rebecca,” who is always favoring “Technical Analysis.” Now, they are visiting the marketplace and looking for good opportunities to invest their Capital. Now Eric is very excited, and he goes into each store.
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He analyzes the business model, the product being sold, and the shop layout to see if they have an advantage over other shops in the same place. Eric also debates with the manager and asks him to bring out the financial statement. Because he wants to analyze some complexities of investing his Capital, then decide whether the company is worth investing in or not.
To put a long story short, Eric is looking for a store with the best Fundamentals, things like the best product, excellent and easy-to-access management, and so on.
On the other hand, we have Rebecca, who finds a fancy spot in the shopping mall and sits on a bench taking good care of her lipstick and hairstyle. She takes out her laptop so that she can take a look at the stock cards for various companies. Rebecca looks at which company has been performing the best based on its stock price.
Moreover, Rebecca spends some good hours looking at those historical patterns of the stock performance. She is looking for a store with a solid upward Trend. Rebecca does not care about the company’s product being sold, nor does Rebecca care about the Fundamentals, like management, business model, or competitive advantage. She thinks these fundamental factors are already accounted for in the stock share price. Rebecca feels she doesn’t even need to be in the mall to make her choice.
Thinking Of Eric And Rebecca About Fundamental & Technical Analysis
Now, Eric thinks that his decision revolves around the company itself and is a staunch believer that the company he is going to invest in will be growing fast in the coming months or years. And he thinks that the stock he will buy is priced way below its intrinsic value, the actual price, and feels that he just pulled off some profit. He is going to base his decision on the company itself.
On the contrary, Rebecca believes that Eric is being stupid and that the historical patterns are telling everything a value investor needs to know. Rebecca is buying the stock because the historical way suggests that the practice will shoot up and not because of anything she sees in the company itself.
There is also a possibility that Eric and Rebecca may choose to invest in the same store. Still, the reasons for their Investments are going to be very different. It simply stores layout, financial statement, business model, product, good management, a competitive advantage, going up against historical Trends and stock price. Every value investor needs to understand that these approaches are widely employed by investing tycoons throughout the Stock Market.
Father Of Technical Analysis: Charles Dow
When we look at the famous names acquainted with the adoption of “Technical Analysis,” it would be unfair if we fail to talk about “Charles Dow.” He found the “Wall Street Journal,” which is the Benchmark under which all Financial papers are measured today. And more importantly, he created the “Dow Jones Industrial” index. In doing so, he paved the way for “Technical Analysis.”
Now some of the Financial tycoons might describe Technical Analysis as the oldest religion out there for most value investors. And the primary tools which are employed for the usage of this type of analysis are “Charts and Indicators.”
Fundamental Analysis By Warren Buffett
Suppose Charles Dow is the father of Technical Analysis. On the other side of the ocean, we have the legendary Investor and the most significant Investor of all time, “Warren Edwards Buffett,” siding with the “Fundamental Analysis.”
According to Buffett, a value investor cannot just rely on traditional charts and indicators. Many external factors are playing their role in price fluctuations. According to Warren Buffett, Fundamental Analysis should be the investing way for all value investors. A Fundamental Analysis measures a company’s Intrinsic Value.
What is Intrinsic Value?
And now, for those still unacquainted with the idea of Intrinsic Value, Intrinsic Value is the value of a stock determined by some simplified assumptions depending on the company’s financial situation. It is of immense importance for both types of Analysts, particularly the Fundamental Analysts.
Warren Buffett’s “Cola” Stock Story
The exciting thing is that Fundamental Analysts study anything related to Security in some way or another. For example, Warren Buffett bought “Cola” stocks because many bottle caps were lying throughout the road when he was walking the street.
He noticed that out of all the beverage products, the “Cola” beverage was the most popular beverage among all the fizzy drinks. It certainly had a competitive advantage which showed that it would outclass all the stocks of its League.
Fundamental Analysis Vs Technical Analysis: Which is Better?
Historical trends unquestionably come in handy, but they are not life and death for fundamental analysts because, at the core, they’re always reliant on company fundamentals. However, for all the fundamental analysts, the ultimate goal is to determine an investment with long-term growth potential by using essential characteristics like business model, management, competitive advantage, financial situation, Etc. Either way, both of these approaches have their Pros and Cons. And it depends on each Investor’s interest as to which path they want to employ.
Conclusion: Fundamental Vs Technical Analysis Comparison
Comparing both approaches, we can undoubtedly conclude that the Technical Analysis is somewhat an old and weary method of finding potential Investments. And it is reliant on indicators that can sometimes fail to live up to its reputation. In contrast, Fundamental Analysis is a more secure way of finding potential Investments.
But both of these approaches can be employed to an Investor’s Advantage. Remember that every value investor has their goals and benchmarks. Some are looking for long-term growth stocks using the “Buy and Hold” strategy. In contrast, the other side is looking for short-term quick cash using the “Dividend Aristocrats” as their investing benchmarks. But everything stems from an Investor’s ability to analyze stocks.
You understand both of these approaches have a common term: “Analysis.” For this reason, we’ve provided several articles explaining the Investment Strategies that are highly important to making better-than-average investing decisions. So, make sure you make the most of it and learn all the strategies. After all, knowledge is what separates the billionaire lane from the ordinary.