When investing in a stock, your goal should be to pay a price that’s less than the value of the company’s future profits.
Unfortunately, predicting any company’s future profits and future growth with accuracy is easier said than done. After all, if we had a crystal ball to predict the future revenue and earnings of every publicly traded company, getting rich would be easy!
So, we use the next best thing when investing in the stock market: analyzing stocks.
Stock analysis helps investors find the best investment opportunities at a given time. By using analytical methods, we can attempt to find stocks trading for a discount to their intrinsic value, and therefore will be in a great position to capture market-beating returns in the future.
Fundamental vs. technical analysis
When it comes to analyzing stocks, there are two basic ways you can go: fundamental analysis and technical analysis.
- Fundamental analysis is based on the assumption that stock prices don’t necessarily reflect the true intrinsic value of the underlying business. Fundamental analysts use valuation metrics and other information about a company’s business in order to determine whether a stock is attractively priced. Fundamental analysis is the best choice for investors looking for excellent long-term returns.
- Technical analysis generally assumes that a stock’s price reflects all available information and that prices generally move according to trends. In other words, by analyzing a stock’s price history, technical analysts believe you can predict its future price behavior. If you’ve ever seen someone trying to identify patterns in stock charts or discussing moving averages, for example, that’s a form of technical analysis. Technical analysis is often used by short-term traders in search of quick profits, but is generally not well suited for long-term investors. Trading stocks based on technical analysis involves a great deal of risk.
One important distinction is that fundamental analysis is typically intended to find long-term investment opportunities, while technical analysis is often geared toward profiting from short-term price fluctuations.
We generally are advocates of fundamental analysis and believe that by focusing on great businesses trading at fair prices, it’s entirely possible to beat the stock market over time. Technical analysis certainly has its place, but we strongly believe that fundamental analysis is the best way to find great long-term investment opportunities.