We all have our opinions.
For instance:
I do not believe in algebra.
I do not believe in pizza boxes or any casing where you cannot tell if the side bits go on the inside or outside.
I do not believe in running.
(And tandem running – or God forbid running as a couple – is the fastest non-verbal way to communicate to the world “we are psychopaths”).
I do not believe in the side bang despite mistakenly sporting them from 2005-2007.
And finally, (this is more fact than belief), anyone who still texts “ROFL” is an actual terrorist.
PSA: seriously don’t use “ROFL”. My Gen-Z sibling just told me that if anyone texted her that, she would “literally call the cops”.
In the financial-verse, they too, have their own set of opinions on things. (More boring than my own to be sure, but necessary for the novice to know nonetheless).
There are two major camps of opinion when it comes to making investment decisions:
Fundamental Analysis and Technical Analysis.
Camp 1: Fundamental Analysis
A method used by investors to determine a stock’s real or “fair market” value.
Fundamental analysts study anything that can affect the stock, from general and macroeconomic factors, such as the state of the economy and industry conditions, to more specific factors like the effectiveness of the company’s management. The name, in this case, makes a lot of sense. It is a method that looks at the fundamentals of a company.
These include, but are not limited to:
- the cash flow in the company,
- business model,
- the company’s earnings-per-share,
- revenue,
- balance sheets,
- profit margins,
- corporate governance, and
- other dry terminology and any public data that helps evaluate a stock.
The end goal is to arrive at a number that an investor can compare with a stock’s current price, in order to see whether the security is undervalued or overvalued. If the fair market value is calculated to be higher than the current market price, the stock is deemed to be undervalued and a buy recommendation is generally given.
Ex. When looking to buy shares of the Coca-Cola company, it would be pretty ignorant to not take into consideration its brand recognition. Few other companies can sell a specific concoction of syrupy-sugar-water that is also known to billions of people… As a fundamental analyst, you would take that sort of qualitative thing into account.
Camp 2: Technical Analysis
A method used by investors to evaluate trading opportunities through the analysis of statistical trends.
Investors in this camp are looking to find patterns and indicators in trading data and historical performance, to determine when and whether the stock will increase or decrease in price. When performing technical analysis, the investor looks at graph-based trends. This name, again, makes sense. We are analyzing the technicals of the stock.
These include, but are not limited to:
- trade volume,
- price changes,
- trendlines, and
- moving averages, and …
- I’ve lost you, haven’t I.
The core assumption is that all known fundamentals are factored into the market stock price, and thus there is no need to pay close attention to them.
Technical analysts do not attempt to measure a security’s intrinsic value (like our fundamental friends). Instead, they use stock charts to identify patterns and trends that suggest what a stock will do in the future.
Distilled:
Fundamental analysts believe the market price of a stock doesn’t always properly represent the true value of the company.
Technical analysts believe the fundamental elements of a stock’s value are already accounted for in the stock’s price and instead make recommendations based on identified patterns.
The Story of Thelma and Louise:
This is not at all the story of Thelma and Louise but serves as an iconic pop culture reference (and an incredible movie reco if you somehow have yet to watch it). I was further reminded of this film while reading about technical analysis, seeing as it made me consider driving off a cliff.
Thelma and Louise go to the mall.
Thelma goes into every store and studies the feel of the denim, aesthetic of the space, if the manager is a bitch and, (inappropriately), counts the cash in the till. She then decides whether she wants to buy that company’s stock.
Louise sits on a bench in the mall with a pretzel and pulls out her laptop (I know, the metaphor, as per, is unravelling). She looks at the stock chart of each company looking for promising chart patterns. In this case, Louise does not consider the feel of the denim, aesthetic of the space, bitchy manager or cash in the till, but rather, assumes these elements are already factored into the share price. In fact, Louise never needed to go to the mall at all, if not for the pretzel craving.
If you cannot decipher which one is the fundamental analyst and which is the technical analyst from this lackluster story – I will actually resign today.
Which is Better and Also my Unsolicited Opinion:
I imagine all my readers live far too busy and chic a life to bother having to constantly check in with their investments. So, fundamental analysis is for you. It is typically used for longer-term investing while technical analysis is more common for short-term traders. A business with good fundamentals will, at minimum, eventually be properly represented by the market in an accurate share price.
*Typically, a major fundamental to look for is also the ability and tendency for the company to pay dividends.
It also, logically, makes more sense (to me, again: unsolicited and unqualified).
But don’t you want to know the gritty details of the company you’re giving your money to? Louise would never have Thelma’s knowledge that the clothing store near the food court smells of mothballs and curry. Or that the manager is actually your boyfriend’s ex who “accidentally” poured that drink on you that one time. Or that they still carry the abomination that is the “jegging”. These sorts of personal things probably won’t come up on a stock chart.
Realistically, every money manager and analyst relies on some elements of both when considering their investment decisions. They’d maybe look at the financials while also glancing at the charts past trends for a foolproof pick? I don’t know. I’m not friends with these people.
Nevertheless, if some douchey finance person uses any of this terminology to try to assert their dominance, you now know what they are talking about. And you can politely excuse yourself and tell them that they look like the type to text ‘ROFL’. And, if my sister’s around, the police will literally be being notified.
Until next week.
Great Read!