| Fundamental Analysis the Easy Way - Part 2 |
In order to really understand why fundamental analysis does not have to be complicated you need to understand some of the common mistakes traders make when using fundamentals to find stocks to trade. These issues include the following...  
This series of articles on simplified fundamental analysis builds on the concepts discussed in the Understanding Financial Statements article series. 1. Traders try to invest in those companies with the most extreme fundamental scores. The issue with this is that it constrains choice and finds stocks at extremes that are likely to be volatile. As a trader, you want a lot of choice and controlling volatility is paramount. 2. Indicator piling or adding more and more indicators, scores and ratings is sometimes perceived to increase the likelihood for a good trade. This kind of probability analysis does not improve forecasting because the variables are independent and cannot affect each other. Additionally, traditional probability analysis breaks down in the market because stock prices are not normally distributed. Adding more analysis increases your work load and will deliver less choice. 3. Context or the overall market and industry environment that a stock exists within must be considered when adding a stock to a diversified portfolio. Trying to compare fundamentals across groups and sectors loses meaning because businesses are managed so differently. 4. One of the reasons the financial markets work so well is because they have a high degree of transparency. That means that most financial information about a stock is broadly known by investors. Therefore, most fundamental information has already been included in the stock's price. Don't fall for sales pitches that show you today's fundamental score and indicate that this predicts future success. That will not necessarily be true. To see the first article in this series on fundamental analysis, click here. The good news is that fundamental analysis can help improve returns by lowering volatility. In the next section, I will show how fundamental analysis does this by removing some of the unknowns that could otherwise increase risk within a stock portfolio. *Author's Note: I am fully aware that there are fundamental junkies out there in "Market-land" writhing in pain and mental anguish at the thought that I would preach such heresy. Therefore, I would encourage you to share your thoughts in the discussion forum. But remember, the goal here is to provide education that can reasonably be used effectively by new retail investors. For those of you with questions about this approach to fundamental analysis, please ask your questions there as well. Next, go to Fundamentals the Easy Way Part 3
Comments deemed inappropriate will be removed
3.25 Copyright (C) 2007 Alain Georgette / Copyright (C) 2006 Frantisek Hliva. All rights reserved." |
| Learning Markets Partners More Partners | Become a Partner |
 |  |  |  |  |
 |
| Learn to Invest | Reviews of Stock Brokers | Stock Picks | Technical Analysis | Broker News | Investor Education | What to Invest In | Live Market Analysis | Should I Invest? |
