Technical and Fundamental, two mainstream strategies to make predictions of stocks. (part2)
Hi friends, welcome back to the blog. Haven’t eaten anything since waking up 5. a.m. in the morning, but it feels good, in some way. It’s the last day of the week, and we shall finish the sharing.
As we’ve introduced what technical analysis is and why it works, it is fundamental analysis who stars today.
Derived from the firm- foundation theory, fundamental analysis is quite the opposite when compared to technical analysis. Fundamentalists, they don’t care how the price performs in charts before, what concerns them primarily are what a stock is really worth. A story tells that a stockbroker sold some stocks to his customer with 760 dollars per share while it could be bought by 730. When being complained bitterly by the customer, the broker just cut him short by saying: you guys got no understanding of our policy at all, we select stocks for our clients not on the basis of price, but of their values. The story is quite a nice telling which helps to understand how fundamentalists think of the game.
As we’ve got some ideas that what fundamental analysis is, let’s see some factors that can’t be avoided when evaluating stocks:
The first one is the expected growth rate. Most of us, we have no idea how wild compounding is and let me set an example, if you invest 200k in s&p 500 for 12 percent of annual return rates at 20, you get nearly 19 million back when deciding to take it out, and 12 percent of annual growth rate is nothing ridiculous but just the average growth rate of s&p 500 for a long run. It’s just simple mathematics, but can you accept that psychologically in the first place, I bet that few people do. Now you understand why expected growth rate is so important as compounding is the magic key to massive wealth, so, as rational investors, we pay higher prices for a share whose growth rate is larger and more likely to last.
The second one is the expected dividend payout, the higher the dividend payout, the more value the stock hosts and it reflects a greater cash flow of the stock. As rational investors, we pay higher prices for a share whose proportion for cash dividends is larger.
The third is called the degree of risk, which is so important that a great many people consider it the only thing need to be examined. In general, the less risk a stock has, the greater value it hosts, because more risk deserves better future rewards, and you deserve a premium for taking extra risk out from the market average. So, as rational investors, we pay higher prices for a share which is less risky.
The fourth one is the level of market interest rate. Just like everything in the world, stock is not such a thing that exists on its own. Interest rates is just so powerful a factor that affects investor’s choices, when it gets high, the crowds are more likely to put their money in the bank or buy some bonds, which causes the lack of cash in stock market, results in the prices declining of stocks in the end. As rational investors, we pay higher prices for a share when the interest rates are low.
As the writer described, the four factors above are just determinants for fundamental analysis, but it guarantees nothing.
There is no need for us to make the hard choice of whether being a fundamentalist or technician, we could make predictions through the combination of the two, and I think that gets the greatest chances for us to achieve our scenario.
That’s all the sharing for today and don’t forget to hit the subscribe button below if you enjoy it and leave your words if you got any feelings or thoughts, have a nice day!