Stock analysis, when done correctly, will change your life! It will help you to turn a small amount of personal savings into a quickly snowballing trading account. Analyzing stocks correctly has the potential to free you from work, debt and a feeling of "want" into one of the rare people who are truly independent, can live anywhere in the world they like and need only to work a few hours each week. It is for these reasons that many people seek to master the stock markets. Learning how to do stock analysis the right way is the first step on a liberating journey of self discovery and personal fulfillment.
Let me take you on a little voyage of discovery....jump into my time machine.
What is "the right way" to do stock analysis? Simple...the right way is the way which has produced the best returns over a long period of time. The feature I love most about the stock market is everything is recorded! We can literally jump back in time to great traders, high performing stocks and market conditions and learn from them. How do we do it? We look for patterns and common denominators. Once we have those, we try and incorporate them into our trading.
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This is what Warren Buffet did. It's what Peter Lynch did, Jim Slater did it too, and so did Marc Faber, George Soros, Jesse Livermore, William O Neill and Nicholas Darvas. The list could go on and on.
They researched why stocks behaved the way they did, cherry picked the winners and then went out and looked for them!
Their first step, to a man, was stock analysis...more precisely, fundamental analysis. Fundamental analysis is about which type of stocks we choose. It revolved around the company that's underneath the quarterly reports. Great fundamental analysts look at factors, like earnings, profit margins, operating profits, sales growth, product pipelines, management quality, the competitive position, debt to equity ratios, and many more. These fundamental factors tell us about the company as a business.
There is another type of analysis...technical analysis. It revolves around the strength of the industry group of the stock, who is buying it right now, and how much they are buying, technical analysis of the stock chart, its performance over a period of time against its peer group and the market in general. Now, most people who rely on fundamental analysis have dirty raincoats and big overdrafts in my experience. Many people, though not all, who rely on fundamental analysis suffer from ever increasing market swings.
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Most highly successful sophisticated investors look at both types of analysis...it's a kind of techno fundamental analysis. The balance in this method is heavily weighted to fundamental analysis....about 80% with technical analysis being about 20% of the weighting. It's more important to buy good companies than it is to jump on great entry points in the stock charts of poor companies.
As investors, we all want to have the "margin of safety" which Benjamin Graham talked about. Buying stocks in outstanding enterprises goes a long way to providing this so that our downside is limited.
However, on its own, this isn't enough protection. Great companies like Cisco have gone through stomach churning corrections of almost 90%. The missing part here was technical analysis...buying the best companies at exactly the right time instead of simply buying the best companies.
When you put both pieces of this stock analysis puzzle together, buying great companies and buying them at precisely the right time, your success in the stock markets is almost assured.
So when you think about investing in or trading stocks, use both technical and fundamental analysis. Keep your overdraft low and your rain coat clean by doing stock analysis the right way!
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