What is fundamental analysis...NOT
ragingbull.com
"Dr. Bob" at Raging Bull, in a column explaining Stock Market Analysis, tells us what is FA (Fundamental Analysis)
Fundamental analysis (referred to as FA) is the study of financial information of companies (or group of companies, such as the S&P 500), such as EPS(earnings per share), book value, ratio of assets to liabilities, long-term debt, dividend yields, etc.
In particular, price/earnings ratio (P/E) and dividend yield have been historically used to calculate whether a stock is overvalued or undervalued. Traditionally, a stock has been considered a more attractive buy when the P/E is low and the yield is high, or when the P/E is lower and the yield higher than that of an index, such as the Dow or S&P 500.
This definition will be news to those of you who believe fundamental analysis is about predicting the business prospects of companies and industries. Fundamental analysis is about using clues from many sources to reach judgments about the future. For example, a fundamental analyst would look at Dr. Bob's definition above, and infer that Dr. Bob is a Technical Analyst, and one who does not have a clue about what a fundamental analyst is and does. We can therefore predict that Dr. Bob's future columns will be about technical analysis. And since he doesn't understand fundamental analysis, we can make a reasonable forecast that the quality of his technical analysis will be marginal at best. |
