Imagine two fighters had a heated clash, maybe on a certain street. To settle the case, a match is fixed for both of them.
The match consists of 4 rounds. The one who wins a total of 3 rounds is the winner. So you want to bet your money. You look at the statistics of both fighters.
The first fighter has a track record of 18 wins, 1 loss and 3 draws in his last 22 matches. He is also the world heavy weight champion with 25 years of experience.
The second fighter is fairly new in the top professional fighting league. He has 6 years of professional league fighting experience. In his last 22 games, he has 16 losses, 3 wins and 3 draws.
If I wanted to bet my money on who to win. I will go for the first guy because the probability is stacked in his favor. I suppose you will do the same too.
Now, what if the condition or the stake changes. You are to bet based on the score line.
That is, if the first/second guy will win 3:1 or 3:0 or 3:2 or the match will end in a draw 2:2
What will be your bet?
Myself in particular I will not bet. Any good fundamental analyst won’t bet their money because the risk has increased. In this case it is better to stay off.
Fundamental analysis is a probability factor stacked up in your favor based on statistics that increases your returns and reduces the risk of losing your investment in the long run.
The ability to study company’s statements and tell if a company is doing well or not is a skill that anyone can acquire.
If you are going to put your money in the stock market, you need to make sure you get the most out of it. The only way you can do that is using fundamental analysis to the best of your advantage.
Here are 5 benefits of fundamental analysis for long term investing.
- It helps you to know the intrinsic value of a stock.
You just go a job in a new city. So you need an apartment to live in.
In the city, on a particular street you like. There are similar types of apartments. They all have a monthly rent fee of $10,000. But you notice one of these similar apartments in that same street with a monthly rent fee of $13,000.
Will you go for the apartment with higher cost or the ones with lower cost? You will probably go for the cheaper one.
A share price can be overpriced or undervalued. With fundamental analysis you can prevent yourself from buying a bubble stock.
- Fundamental analysis gives you the facts and performance
If you happen to have a phone call with your brother or son in a boarding school and you ask him how he is doing with regards to his academics. The answer will be probably fine. But when his academic result is released it will give you the bigger picture of his performance.
Executives and managers of various companies say positive and nice things on what the company is doing and what is going to do. But we can always see if their keeping to their words in the company’s financial reports that is released every quarter.
- Fundamental analysis can tell you about a company’s trend
Trend is a very important concept in fundamental analysis. It is not safe to invest your money in a company that fluctuates. Last 5 years they did will. 3 years ago they did not perform well. A year ago they perform well. This year you are not sure if they will perform poorly or not.
The idea of analyzing the past trend is that you need to see consistency and improvement in its metrics like the earnings, debt, free cash flow and revenues.
- It helps to tell how effective the management team is doing.
A lot of people buy stocks for the wrong reason. It could be because of they like the company or the company is popular or they admire the corporate lifestyle of people in a certain company/industry and many other reasons.
If you invest that way, you will lose a lot of your money in the long run. It is best you do proper analysis on the expertise and implementation of the management.
- It helps you know when to bail out from a good stock turned bad.
You have bought and compounded a wonderful stock which has benefited you in the long run through price growth and dividend growth. At some point the price starts faling and you get worried should I sell this stock.
This is where fundamental analysis comes in. If the company’s fundamentals is deteriorating, it is best to sell the stock but if it is still good it is advised you still keep your position.