Fundamental approach to investing
Deciding which investments make sense for you can be difficult. What I have found is that sometimes it helps to go back to the basics and consider already proven ways that investors have used to analyze investment performance over time. The two basic approaches are fundamental and technical analysis. I would like to address the fundamental method in this article.
In fundamental analysis, the investor evaluates a stock by looking at the company’s financials in terms of per-shares values. Great concept. This will allow the investor to calculate how much of the stock’s proportional share of the business is worth. There are different methods of evaluation such as value, growth, GARP, income and quality .
Let’s talk about value investing. The goal of the value investor is to buy stock at a discount of its intrinsic value – or what the business would be worth if it were liquidated tomorrow. In selecting investments, value investors focus on ratios that illustrate relationships between the current market price and certain business fundamentals. Some examples that you may have heard of are price/earings ratio (P/E), dividend yield above a certain absolute limit and book value per share.
What about growth investing you ask. With growth investing, the idea is to buy stock in companies with good potential for growth in sales and earnings. Growth investors tend to focus more on the company’s value as an ongoing concern rather than the liquidation value. Many investors plan to hold these stocks for several years. Excited by new companies, new industries and new markets, growth investors normally buy companies they believe are capable of increasing sales and earnings each year.
I have not forgotten the income investor. There are still many people who buy stock primarily because of the dividend. Income investors tend to forgo stocks with greater potential for capital appreciation in favor of high yielding dividend paying companies. These investors may focus on utilities and REITs (real estate investment trusts) .
What exactly is GARP investing? GARP stands for growth at a reasonable price. GARP investors combine the value and growth approach. They look for companies with solid growth prospects and current prices that are lower than the intrinsic value.
I can’t leave out quality investing. Most investors today will use a hybrid approach of value, growth and GARP. They are looking for high quality stocks selling at reasonable prices and they care about the valuation. The inherent quality of a company is measured by ratios like ROE or return on equity.
Whatever kind of investor you are, using fundament analysis can yield good results. The most famous fundamental investor is Warren Buffett. His mentor, Benjamin Graham, wrote “The Intelligent Investor,” a classic statement on value investing. Another professional I admire is Philip Fisher, whose book “Common Stocks and Uncommon Profits” is a classic statement on growth investing.
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I will talk about technical analysis in a future article. If you would like to know more about both fundamental and technical analysis and how it can help you, contact me at 841-4277.
Carol Perry, a Northern Nevada resident since 1983, represents the firm of Edward Jones Investments in Carson City.