Fundamental Analysis 

Fundamental Analysis Meaning

We all want to earn consistent money from the stock market as well as from our other sources of investment and all wish needs to be nurtured with the right type of research and analysis to attain its objective in the near or long term.

I have joined many groups on social websites where all the time people busy asking the good picks or calls to invest in the stocks to attain their short term goal. This is a very common practice for all of us that we ask these most important questions of our life from unknown persons and then collect the reviews, if there are more "yes" to one particular sector or stock then we blindly jump on that without knowing it's insights, news, change in business structure, etc. 

I am asking from all those that can trust anyone for their hard-earned money:

Can you blame for those unknown guys for your losses to whom you never met or don't even know their backgrounds? 

You entered into panic and then after suffering from losses you exit into a panic.

For buying a simple product from the market we search so many shops, so many brands, for warranties &guarenties and the features of that product but at the time of investment, you just throw your money into the mud. WHY??

Start investing from your own research and you will find the ways by yourself, a sense of satisfaction that yes you know your decision is correct and it will be fruitful either today or tomorrow. It is not that difficult as it seems to be and none of any specialized background required for this.

What is Fundamental Analysis?

Fundamental Analysis is a wide approach to the study of any business. Study of the business from various aspects and judging its growth with its historical achievements. This is very necessary if any investors want to put their money in the long-run say 3 to 5 years or more.

For long term investors, it is very important to keep themselves away from the external noise to earn consistently. Noise should not be misinterpreted from the news about the company, the company's growth information, any big reforms in the company, etc, noise is somewhat different, let's say you have invested your money for the period of 2 years after proper analysis but suddenly you listen to rumors that the stock price will go down in short-term and you exit from it due to fear. If you are a long-term player then you need to not worry about short-term gains and losses and if you are worrying then you don't trust your analysis but trusting to the people who are making noise to clear the company from trader's stuff. YES, you read it correct company and management doing there best for consistent growth and they want the serious investors into the company despite only traders because investors can benefit the company in the long-run to create wealth, traders only work to create volumes which only make sense in short-term.

How Fundamental Analysis different from the technical analysis?

Technical analysis works on short term targets and objective, here you can find the right entry and exit point of the stock, you can bargain with the stock price with the help of technical analysis but this is only fundamentals of the company which creates wealth for you.

This chart has been taken from "Money control" website

We will try to understand from the above chart of Bajaj Finance that who have invested their money in 2002 at RS.5 what happened to their investment till 2020, their investment grows by 97900 % in 20 years. The investment of Rs 500 becomes Rs 490,000 excluding dividends and bonuses, this is called wealth creation. 

You can see here that if you invested in 2002 then you get negligible returns till 2005 but after that, it started getting double year on year, that's the difference of technical and fundamental analysis. No traders can make that much of wealth because as much they earn in one day they lose a double the second day. Price fluctuation is the beauty of the stock market, we should enjoy it to create wealth in terms of accumulation of big stocks on dips in spite of selling them on the rise.

see another example:

                                   This chart has been taken from "Money control" website

Investment of Rs12000 in 2005 becomes 220000 in 15 years that is 1833 percent returns apart from very good dividends and bonuses. There are thousands of examples we can check but the key is to stay invested with good companies. Momentum players can only earn their butter bread while investors and become big bigger and biggest.

Myths of Fundamental Analysis

• Only CA can become a fundamental analyst of the stock
• Required Commerce background or MBA Finance
• Required a fund manager to manage your money
• Very difficult and tricky
• Many formulas need to cram

Key Points required for fundamental analysis

• Understanding the basic of financial statements
• Understanding the business with respect to the industry
• Understanding of  accountancy basics
• Basic mathematics operations of BODMAS
• Reading, interpretation and reasoning skills required

Investment Strategy 

Investment strategy should always be depended upon the personal financial objectives and goals but as per investing rule your investment among equity and fixed interest sections should be segregated after subtracting your current age from 100, Let's say your age is 30 so 100-30=70, your 70 % investment should be in equity while 30 %should be in fixed interest group options(high-grade bonds, gold, government debts, FDs and other safe assets).

Whereas what about of that 70 % in equity: Let's say you have 700,000 to invest in equity, This corpus should be divided into two unequal portions say 70 and 30, that 70 % of 700000 should be the part of your core portfolio (for long-term after proper fundamental analysis) and rest of 30 % should be used for momentum play after doing technical analysis.

A good growth rate or CAGR(Compounded Annual Growth Rate) of long-term investment should be 15 - 20 percent year on year while your short-term trades are expected to give at least 10-12 % of an annual rate of return.

This trading portfolio is termed as "satellite or active portfolio" while the long-term portfolio is known as "Core Investment Portfolio"

Tools of Fundamental Analysis

• Annual Report of the company: All the company information available for fundamental analysis is available in the annual report of the company. Ratio Analysis is very important in the annual report of the company.
• Valuation: Valuation includes all the below-specified details to be evaluated with respect to each other

 

• News and updates: All the good and bad news related to the company is directly related to the stock price of the company so regular news flow should be maintained from trusted sources.

• Shareholding Pattern: This gives you a brief of pledge shares as well as promoters shareholding, mutual funds shareholding, FIIs shareholding, DIIs shareholdings, this is also very important as it shows the confidence of shareholders on the company, pledge shares should not be increased and promoters shareholding should not be decreased. While both of these are allowed with little changes for the development of regulating norms perspective of the company.

• Peers: Peers' performance also an important part of the fundamental analysis because it proves the strength of the stock in the industry and how other players are performing in the industry.
• All the above information is readily available for you on many websites, only you have to check and interpret to decide your best investment strategy.

Also, read https://bijimoney.blogspot.com/2020/06/Investment-Strategies.html