Fundamental Analysis (FA), is a holistic way to analyze a company. An investor who wants to invest in a company for the long-term (say, 3 to 5 years) will need to be able to see the business from multiple perspectives. Investors must be able to see past the noise of stock market fluctuations and focus on the business's underlying performance.The stock prices of a fundamentally sound company tend to appreciate over time, creating wealth for investors.
These companies are plentiful in India. You can think of Infosys Limited and TCS Limited as examples. Page Industries, Eicher Motors (Bosch India), Nestle India, TTK Prestige, etc. are just a few. Over the past 10 years, each of these companies have delivered an average compounded annual growth rate (CAGR) of over 20% year after year. To give an idea, an investor who invests at a 20% CAGR would have his money double in approximately 3.5 years. The wealth creation process is faster if the CAGR is higher. Bosch India Limited has achieved a 30% CAGR. You can see the potential wealth creation speed and magnitude if you invest in fundamentally strong businesses.
These long-term charts by Bosch India, Eicher Motors, and TCS Limited will help you to think and understand well about long-term wealth creation. These are only three examples of the many available in Indian markets.
I have chosen charts that look great to highlight my biases. It is possible to wonder what the long-term charts of companies like Sterling Biotech, Reliance Power and Suzlon Energy might look like.
Here are the long-term charts for these companies:
These are only three examples of wealth destroyers you might find in Indian Markets.
It has been difficult to distinguish between investment-grade companies that create wealth and those that destroy it. There are a few things that distinguish investment-grade companies from others. The same is true for wealth destroyers. A few traits are easily visible to an adroit investor.
Fundamental Analysis helps you to identify wealth-creating companies and gives you the confidence to invest long term.
You can. Fundamental analysts can also be chartered accountants or professionals with a commerce background. This is a common misconception. It is false. To make it equal 4, a fundamental analyst adds 2 to 2. You will need to have some basic skills in order to become a fundamental analyst.
Fundamental Analysis's goal is to help you acquire the first two skills.
Technical Analysis (TA) helps you garner quick short term returns. This helps you to time the market for better entry and exit. However, TA is not a good way to make wealth. Only intelligent, long-term investments can create wealth. Both TA and FA must be part of your market strategy. Let me give you an example of Eicher Motors' chart:
Let's say that a market participant recognizes Eicher Motors as a strong stock to invest in and invests his money there in 2006. The stock has made very little movement between 2006 and 2010. Only in 2010, the real movement in Eicher Motors began. The real move in Eicher Motors began only from 2010. This would have made it easier for the market participant to trade short-term positions during this period. The investor can use technical analysis to help him make short-term trading decisions. Both TA and FA should be considered as part of your overall market strategy. This leads to a crucial capital allocation strategy known as "The Core Satellite Strategy".
Let's say that a market participant has Rs.500,000/-. The corpus can be divided into two equal parts. For example, it can be divided into 60 and 40. It is possible to invest the 60% capital, Rs 300,000./- for a long time. The core portfolio is made up of this 60% investment. The core portfolio should grow by at least 12% to 15% annually.
The remaining 40%, or Rs.200,000/, can be used for short term active trading using Technical Analysis technique. This technique is applicable to equity, futures and options. You can expect a minimum 10% to 12% annual absolute return from the Satellite portfolio.
Fundamental analysis requires fundamental tools, many of which can be found for free. You will need the following tools:
These four tools can be used to create a foundational analysis that rivals institutional research. If you believe me, I will tell you that fundamental research is possible with just four tools. The goal is to make the research easy and logical at all levels of the institution.