Getting started with Fundamental analysis.

 Getting started with Fundamental analysis

"Know what you own, and know why you own it." ~ Peter Lynch.

As Peter Lynch said this is one of the reasons why everyone should learn Fundamental analysis. So, what is Fundamental analysis? It is simply a holistic approach to study any kind of business. If we master fundamental analysis then we would be able to pick good business for a fair value and get good returns in them. But to get good returns one must be invested in one company for more than 4-5 years and so it is crucial to know the business in which we are going to invest. Investors must separate the short term noise that affects the stock price and focus on how the business is going to perform in the long run.

Over the long-run fundamental strong company will definitely grow and give its investors good returns. We have some of the companies which have given an average of 20% compounded average growth return (CAGR) year on year over the last 5 years.

Here some of the companies which have given good returns to its investors :

 

     1.TCS has given 38.12% return to its investors.

TCS Price Chart (Max)

     2. Abbott India has given 24.71% return to its investors.

Abbott India Price Chart (Max)

      3. Hindustan Unilever has given a whopping 80.01% to its investors.

Hindustan Price Chart (max) 

But there's a catch we may think all companies will give good returns, here are some companies which have given negative returns to its investors.

      1. Suzlon Energy has given negative returns of (-272.25%).

Suzlon Energy Price Chart (Max)

     2. Reliance Power has given (-0.11%) return to its investors.

Reliance Power Price Chart (Max)

     3. Vedanta had also given negative returns in different points to its investors.

Vedanta Price Chart (Max)

So, we should always invest in fundamentally strong companies.

Can anyone be a fundamental analyst?

Yes, of course, anyone can become a fundamental analyst. It's a misconception that only charted accountant, CFA or anyone from commerce background can only become good in picking stocks fundamentally. Anyone can become good at it just you have to learn some skills:  

  1. Understand the financial statements like balance sheet, Profit and loss statement and  cash flow statements.

     

  2. Understand business respect to the industry it's operating.

  3. Basic math such as addition, subtraction, multiplication and division.

Why should we use Fundamental analysis and not Technical Analysis for creating wealth?

Technical analysis is used for getting quick short term returns. It helps you to time the market and tells you the entry and exit points which is very risky and cannot be used for creating wealth. Wealth is only created by making good long term investment in promising companies after knowing their business. But both Fundamental analysis and Technical analysis should be used in our market strategies so that we don't miss any opportunities in the market.

Now, let's take an example of how we should start investing. Say you have accumulated $10,000 ( you can start as low as we wish.) we can split it in 60-40 i.e. 60% of the amount should be invested in fundamentally good companies for wealth creation and 40% of the amount can be used for making short-term returns.

Tools that can be used for Fundamental Analysis.

Tools that are required for doing fundamental analysis are very basic and all are freely available.

 1. Annual Report- Annual report of the company is a type of report that the company issues annually. Here you can find each and every detail of the company. It's freely available on the company's website.

 2. Access to the news- Daily news helps us to stay updated and know what is really going on in the market. Google alerts helps to keep track of the company you are picking.

 3. Industry-related data- we need to know the industry-related data to see how the company we are picking is performing with respect to the industry.

 4. Excel- Although it is not a free tool, it's very useful for fundamental calculations.

So, these were only the basic things required for us to become a successful fundamental analyst. And always remember to keep things simple and not make them complicated.

And if you want to learn more about investing please refer these:-

• What really is the stock market?
• What is the Stock Exchange?
• The two approaches to investing.
• Jargons used in the stock market. 
• Factors that affect stock price fluctuations.
• Stock investing is like gambling, myth or reality?

~By Suddha.